The Fullerton Weekly: Asian Central Bank Moves (16 May 11)

China’s 4th Reserve Requirement Ratio hike in 2011
The People’s Bank of China (PBOC) announced a 50bps RRR hike last Thursday, increasing the RRR in large banks to 21%. This was largely an open market operation, reflecting the need for the central bank to sterilize liquidity from maturing PBOC bills, trade surplus and continued capital inflows. In addition, the PBOC resumed the three-year bill auction, where RMB 40 billion of bills were auctioned at 3.8%. The availability of other tools to mop up excess liquidity suggests that pace of RRR hikes will moderate. On a separate note, China’s April CPI came in at 5.3%, slightly higher than market expectation of 5.1%-5.2%. However, M2 growth of 15.3% was lower than expectations. Bank of Korea stays on hold The Bank of Korea’s (BOK) latest decision to keep rates unchanged caught the market by surprise. After April’s pause, the BOK was widely expected to move in May with a 25bps rate hike. Recent data showed that headline CPI inflation continues to remain above the BOK’s target band. However, domestic price pressures are moderating with a slowdown in domestic and overseas manufacturing growth. We are generally neutral to long KRW duration in our Asian fixed income portfolios. Policy rate unchanged for 3rd consecutive month in Indonesia Bank Indonesia continued to stay on hold, leaving the policy rate unchanged at 6.75%. 2011 GDP growth and inflation forecasts were maintained at 6%-6.5% and 4%-6% respectively. Despite the easing of CPI inflation from 6.7% in March to 6.2% in April, core inflation remains a concern, increasing 4.6% in April. Hence, we are largely neutral on IDR duration in our Asian fixed income portfolios.

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The Fullerton Weekly: Asian Central Bank Moves (16 May 11)

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