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US Rate Hikes Could Impact Asia-Pacific Banks

U.S. economists tend to keep their ears to the ground when the Fed hints at foreseeable rate hikes, but the country's latest monetary tightening outlook is also catching the attention of Asia-Pacific banks that could face repercussions in foreign funding. On May 17, Fitch Ratings stated it anticipates the Fed fund rate to reach 3.25% by the end of 2019—a possibility that could make Asia-Pacific banks "more vulnerable."

According to the Fitch report, banks in the Asia-Pacific region have managed to handle U.S. rate hikes in the past, notably when the rate increased substantially from 1% to 5.25% between 2004 and 2006. However, there's higher market dependence this time around, which could affect the feedthrough to Asia-Pacific banks in regards to U.S. dollar interest rates, foreign-exchange movements and local interest rates.

"Most banking systems have some vulnerability to market risk, although those appear to be limited" to financial centers in Hong Kong, Singapore, Mongolia and Sri Lanka, Fitch noted. "Higher U.S. rates could also feed through to local interest rate rises, which would most likely affect credit risks in most markets," including China, Vietnam and India.

Back on the home front, NACM Economist Chris Kuehl, Ph.D., said the Fed's May minutes weren't particularly controversial, seemingly arriving at a consensus that there will be two more rate hikes this year, likely in June and September.

"There is less certainty about what happens next because there are some who are advocating for a slow pace and others who think a December hike should be on the table," Kuehl said. "Most also agree that rates will continue to rise into 2019 at about the same pace as this year."

-Andrew Michaels, editorial associate

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Saturday, 23 March 2019