* U.S. Fed raises rates 25 basis points on Wednesday
* Two more Fed rate rises planned by year-end
* Move pressures emerging economies despite local conditions
* Monetary easing in Asia could now be just for emergencies
By Vidya Ranganathan
SINGAPORE, March 16 The long cycle of falling
interest rates in Asia could be over after the U.S. Federal
Reserve's third rate rise in 15 months was followed quickly by
monetary tightening in the world's second-biggest economy,
The Fed's widely anticipated rise of 25 basis points on
Wednesday was also only its third since the global
financial crisis, having reined in earlier temptations to raise
rates out of concern for the impact on fragile emerging
economies that still needed looser monetary conditions.
But the Fed signalled again that such reticence is over,
repeating its projections for at least two more rate rises this
year as the U.S. economy strengthens.
"At the very least, the Fed's desire to step up the pace of
policy normalisation has changed the conversation at many
central banks globally," said Sean Callow, an economist with
Westpac in Sydney.
"Further monetary easing is now largely seen as only if
needed to 'break the glass', not a plausible baseline."
The People's Bank of China promptly raised the rates on the
short-term funding operations it conducts for the country's
banks for a third time this year on Thursday.
The Fed's move would otherwise make it harder for China to
stop its currency weakening and arrest a persistent outflow of
capital. China also wants to cool a run-up in debt and the risk
of a property bubble.
The Bank of Japan (BOJ) announced the verdict of its regular
policy meeting on Thursday, opting to stand pat with its 0.1
percent short-term interest rate target and a loose commitment
to keep buying bonds, though core inflation is far below its
ambitious 2 percent target.
Some analysts expect the BOJ will in due course have to
raise its zero percent yield target for 10-year Japanese
Broader evidence of the shift in central bank thinking will
be on hand later in the day as central banks in Indonesia,
Norway, Switzerland and Britain review policy.
THE CURRENCY CHALLENGE
The Fed's new policy path is a sea change for global markets
used to a decade of easy money. And while emerging markets are
showing some signs of strength, with a recovery in commodity
prices and growth in exports, they are struggling to fire up
But their freedom to fit domestic rates to local demand
conditions is constrained by the need to keep hold of the
foreign capital that flooded in seeking higher yields when
developed world rates were at rock bottom. And they also need to
prevent their currencies from tumbling against a rallying dollar
"Even if domestic conditions warrant a cut, fears about
exacerbating financial market volatility will keep central banks
cautious," said Tim Condon, ING's chief Asia economist. "It
definitely complicates life for those central banks that either
needed to or wanted to cut rates."
Condon was expecting Indonesia's central bank to cut rates
twice this year, but says he is now "uneasy" about that call.
"To the extent that U.S. rate hikes do put pressure on Asian
central banks to tighten policy, it will be through currency
movements," Gareth Leather, senior Asia economist at Capital
Economics, said in a note.
Emerging markets have already had a dress rehearsal for such
circumstances in 2013, when the threat of Fed policy tightening
triggered a "taper tantrum" of volatility, prompting central
banks in India, Indonesia and elsewhere to defend their
currencies via higher rates.
South Korea is also juggling competing pressures. Its policy
rates are barely above the Fed's, it wants to avoid unsettling a
highly indebted housing sector, but it also has a huge amount of
foreign money in its bond market that could take off for greener
The Fed's raise was not the only piece of news that could
encourage the world's central banks to a firmer stance.
Elections in the Netherlands, where the anti-EU party of
Geert Wilders won fewer seats than expected, came as a relief to
markets, though next month's presidential election in France is
still hanging over the continent, with the far-right Front
National candidate Marine Le Pen showing strongly.
For Switzerland, uncertainty has the opposite effect on its
safe-haven currency, driving it higher despite negative interest
The Swiss National Bank is not expected to change its rates
later in the day. Its negative rate policy, in place since 2015,
is aimed at curbing demand for the currency in a period of
destabilising elections across Europe that could boost
The Norwegian central bank, while keen to start raising
rates, is likely to keep rates on hold, too, after a tumble in
inflation as it worries about a strong currency.
The dilemma for the world's central banks is that markets
driven by the Fed's lead will force them to respond, regardless
of domestic conditions.
Callow at Westpac said the domestic logic, "in any country
or zone where wages growth is weak and core inflation not on a
clear self-sustaining uptrend", would otherwise be to ease
"Which is actually most of the world," he said.
(Rreporting by Vidya Ranganathan; Editing by Will Waterman)