The coronavirus started in Asia and as it spreads around the world it is worth reflecting on the region’s central bank responses so far and thinking about what may happen in the near future. Monetary policy actions in Asia and globally have received much attention and justifiably so. But as the fiscal responses to the potential global recession grow, harder questions about central bank limits are coming soon.

Where are we now? So far, it’s “follow the Fed” – a maxim that still applies, including in Asia. The Fed’s extensive actions, which consist of a series of intermeeting announcements since Sunday 15 March to before the opening bell on 23 March, undoubtedly sets the bar for other central banks.

In Asia Pacific, March has seen policy rates drop in Australia (to 0.25%), Indonesia (4.50%), Korea (0.75%), Malaysia (2.50%), New Zealand (0.25%), the Philippines (3.25%), Thailand (0.75%), and Taiwan (1.125%), with Hong Kong (0.86%) following its pre-set formula based on the Fed Funds rate. In terms of asset purchases, Korea announced it would buy government bonds to stabilize markets, while Japan increased its buying program for both equities and corporate debt. The Fed’s move to expand its central bank swap lines, though notably not with China, underlines the risk posed by a potential global dollar shortage.

In the future, the Fed may follow Asia, at least a bit, in terms of expanding its toolkit. Former Fed Chair Bernanke gave a nod to Asia in his January American Economic Association Presidential Address, citing a version of Japan’s yield curve control (YCC) as a policy worth considering possibly for the 2-year Treasury (Governor Brainard also floated following Japan in this way). Notably, Australia adopted its version of YCC, modified by targeting the yield on its 3-year sovereign. In contrast, venturing into negative rates, as has been done in Europe and later, unfortunately in Japan, is unlikely for other of the region’s central banks, let alone the Fed, given the risk-reward consideration.

Stepping back, it should go without saying that central banks should not be the focus of policy responses to the coronavirus pandemic and its devastating consequences. In that respect, Singapore and China – places where virus containment protocols of first-order importance are quickly becoming global models – bear some attention. Singapore this week joined the global trend and eased its monetary policy settings, but the MAS statement clearly states that its stance, “reflects the primary role of fiscal policy in mitigating the economic impact of COVID-19.” In mainland China, cuts in lending reference rates have defied market forecasts and instead have been very measured, with the focus again more on fiscal policy.

The emphasis on fiscal policy will likely get even more pronounced with Singapore taking the lead globally by adding another close to 10% of GDP to its package. Returning to monetary policy, eventually those Asian central banks not yet at their effective floor may get there. At some point, perhaps soon, thornier questions about politicizing monetary policy, central bank independence, and monetizing government spending will be heard more frequently. In Asia, the line between the central bank and the government was never as bright as it became in the US in the post-Volcker world. Unless Asia sees green shoots of a recovery in the coming months, full-blown, internally-coordinated national responses will be demanded, including the deployment of sovereign wealth funds that countries like the US lack. In that situation, don’t be surprised to find more Asian central banks more integrated into their national teams.


Dave Fernandez is a professor and the director of the Sim Kee Boon Institute for Financial Economics at Singapore Management University. He is an Advisory Panel member of the ASEAN+3 Macroeconomic Research Office. This article appeared in the Singapore Business Times, 1 April 2020 and can be seen here:


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