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
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
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.