Asia must hike interest rates and cut government spending in order to combat inflation and stem the risk of economic overheating, analysts said this week. Fears grow that loose policies in the region could trigger a hard landing.
ADB chief economist Jong-Wha Lee told Emerging Markets in Tashkent yesterday: Now is the time for Asian central banks to tighten interest rates. Policymakers should adopt more prudent fiscal policy as the regional economic recovery is well entrenched.
Asian economies have roared back to life thanks to fiscal and monetary stimulus, and a pick-up in exports and consumption, while production has returned to pre-crisis levels. The IMF this week raised its growth forecasts for Asia to 7.1% for both 2010 and 2011.
However, low interest rates and high government spending is fanning inflationary pressures while strong capital inflows have heaped on the risk of economic overheating.
Lee said that Asian central banks which before the crisis gained a reputation for prudent monetary policies that focused on price stability should increase the pace of monetary tightening.
Hung Tran, head of the capital markets department at the Institute of International Finance (IIF), said: There are signs of overheating in Asia, principally India and China, so governments should consider unwinding fiscal stimulus and central banks should begin to tighten interest rates.
Regional governments have disbursed an estimated $950 billion into domestic economies through direct investment, tax cuts and subsidies to boost growth. But Asian countries should now start to accumulate fiscal space to prepare for the next potential crisis, Lee said.
Michael Spencer, chief Asia economist at Deutsche Bank, said: Countries have been slow and deliberately so in raising interest rates, yet we have had four quarters of the strongest growth we have seen in years. He said the South Korean central bank much slower than it normally would have been to raise interest rates and recommends a 1% policy rate hike.
Frederic Neumann, senior Asia economist at HSBC, said: with the financial seas much calmer, and interest rates far lower, growth, price pressures and asset prices have returned to life. And again, policy is starting to fall behind the curve.
In emerging Asia, relatively stable headline inflation readings should not deflect from the fact that sequentially core prices are still accelerating, Neumann said. Firms are widely reporting soaring input costs as tightening labour markets pushes up wages, notably in China and India, but also increasingly in Taiwan and Korea, he said.
But a counterpoint came from Amando Tetangco, governor of the central bank of the Philippines. He said that the formation of asset price bubbles was an acknowledged risk, given the likely surge in capital flows to emerging markets. He added: In the case of the Philippines, the various credit and asset market indicators do not suggest any overheating in the near term.
Peter Redward, head of Asian emerging-markets research at Barclays Capital, said that the domestic policy mix in Asia is broadly appropriate, since there is still excess capacity in regional economies.