Asia's economic growth prospects to get strong boost from hefty US rate cut

FE Team | Published: September 20, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

Manila, Sept 19 (AFP): Asia's economic growth prospects will get a strong boost from the US Federal Reserve's hefty cut in interest rates, Asian Development Bank president Haruhiko Kuroda said today.
"The latest decision by the US Federal Reserve would be welcomed by many in the region because that would first of all reduce the financial sector turmoil," he told a news conference on the sidelines of an aid conference in Manila.
"It would definitely improve the prospect of sustained strong economic growth in the US and would also be beneficial particularly for the emerging economies of Asia," he added.
"I would say that the decision would be greatly appreciated by many economies and the financial sector in the region."
The US central bank Tuesday cut the federal funds rate, which banks charge each other for overnight loans, by a hefty half point to 4.75 per cent, the first reduction in four years. The move was cheered by financial markets around the world.
Manila-based ADB, downplaying the chances of a US recession, Monday raised its economic growth forecasts for developing Asia this year to 8.3 per cent from 7.6 per cent in March.
Next year's growth should be 8.2 per cent, up from the earlier forecast of 7.7 per cent, it said.
Meanwhile, the US Federal Reserve delivered a surprisingly strong jolt of stimulus to a struggling economy yesterday, cutting key rates by half a point as insurance against a downturn, analysts said.
The cut in the federal funds rate to 4.75 per cent ignited a powerful rally on Wall Street, with stock indexes surging by more than 2.5 per cent. But bond market reaction was lukewarm with long-term yields showing a surprise increase.
The Federal Open Market Committee (FOMC) headed by Ben Bernanke, in a unanimous decision, also cut its discount rate for direct central bank loans by 50 basis points to 5.25 per cent.
The cut in the federal funds rate is likely to lead to a lowering of borrowing costs across the economy, for consumers and businesses alike.
Some analysts hailed the move as welcome relief for ailing housing and credit markets; but others said it was effectively a bailout for speculators and others who took on too much risk.
"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," the FOMC said in a statement.
"I think the Fed delivered a healthy dose of monetary medicine to the economy and housing market," said Scott Anderson, senior economist at Wells Fargo.
Brian Bethune, economist at Global Insight, commended the Fed for moving to head off a downturn and restore confidence in credit markets.
"The forest fires in the economy had been spreading rapidly in the July-August period, and the Fed has recognised that it is going to take more than just a few buckets of water to bring this situation back under control," he said.
The policy-setting committee, which was forced to reconsider its tough monetary stand when financial markets were roiled by fears of a wider economic crisis, had been widely expected to cut interest rates.
But analysts had been divided on whether the central bank would move by a quarter point or a bolder 50 basis points. Some economists said a large cut might fuel inflation or bring back the easy-money conditions that created the problems.
Some said the Fed opted for the more aggressive move, in the hope that economic and credit conditions would return to normal and that it would not have to trim rates at its next meeting October 30-31.
Diane Swonk, economist at Mesirow Financial, argued that there were divisions among Fed members, "and the compromise is that they're doing it now and hoping that they won't have to do it again."
"While today's cuts were more aggressive than many were looking for, the statement indicates that the Fed has assumed a more neutral stance, which lessens the odds that there are more rate cuts in the pipeline," said Dawn Desjardins, senior economist at RBC Financial Group.