Europe’s sovereign troubles may have put the global interest rate hike cycle on hold.
“Central banks that haven’t started their tightening cycle by now are unlikely to start it in the near future, probably the rest of the year,” said Glenn Maguire, chief Asia economist with Societe Generale in Hong Kong.
“There will be extreme caution displayed by Asian central banks in terms of removing emergency settings of policy that were put in place during the subprime-Lehman crisis,” he said.
Watch Malaysia this week for a sign of things to come for other nations:
The Malaysian central bank will be first test case when it reviews policy on Thursday. After it surprised markets in March by raising rates for the first time since the global downturn, some money had bet on another rate rise this month.
Those expectations have been whittled down and some economists said the chances Bank Negara Malaysia will carry out a second interest rate increase in the current cycle have fallen significantly.
Rate hikes are off the table for now in China, which has raised bank reserves requirements three times this year, and a shift in yuan policy is likely delayed.
Face it, easy money is the path of least resistance for politicians and business in the near-term, even if the long-term risks can be substantial. Fear of a European credit crisis is just the excuse everyone needed. Perhaps countries will even persuade themselves to tolerate higher inflation readings in the name of keeping credit markets liquid and Asian currencies from appreciating too much against the euro.