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NEWS UPDATES 12 July 2010

Interest rate hikes in Asia

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Recent moves by Asian central banks to raise interest rates are a strong vote of confidence that the region will weather risks stemming from the European debt crisis, analysts say. Since June 24, the central banks of Taiwan, India, Malaysia and South Korea have lifted interest rates by between 12.5 and 25 basis points, citing the need to tame inflation as their economies rebound from the global downturn.

While Asia is not totally immune to the effects of a slowdown in Europe and the United States, the region’s dependence on them has been reduced as Asian consumers now play a bigger role in supporting domestic economies, analysts said.

“Concerns over Europe’s debt crisis continue to smoulder but that hasn’t stopped Asia’s central banks from pushing ahead with monetary tightening” in the wake of rapid and sustained gross domestic product [GDP] growth, said Singapore’s DBS Bank.

Inflation rates are “nearly back to average in all Asian countries and surely headed higher in months to come,” it noted in a market analysis.

DBS said the latest interest rate increases “are a loud vote of confidence from Asia’s central banks that (Asia’s) growth will continue despite weakness” in Europe, the United States and Japan, the region’s top trading partners.

By increasing interest rates, Asian central banks are signaling that while these three markets matter, “Asia matters more”, DBS added.

David Cohen, a Singapore-based regional economist with Action Economics, said the spate of interest rate hikes reflected growing Asian confidence as the region leads global growth. “As far as the economic outlook is concerned, global markets are clearly nervous about potential faltering in the global recovery but so far the data out of Asia has been encouraging,” he told Agence France-Presse.

Cohen added that second quarter GDP figures, expected to come out this month, are likely to show a continuation of Asia’s healthy economic expansion.

The International Monetary Fund on July 8 upgraded its GDP growth forecast for Asia this year to 7.5 percent from 7.0 percent, moderating to 6.8 percent in 2011.

Taiwan’s central bank on June 24 raised its key interest rate for the first time since the export-dependent island was thrown into recession by the global downturn.

Malaysia followed on July 8, increasing its key interest rate for the third time this year, citing robust economic activity in the second quarter.

Bank Negara, the country’s central bank, raised the overnight policy rate by 25 basis points to 2.75 percent.

Consultancy Capital Economics, commenting on Malaysia’s move to raise interest rates, said it reflected a view by officials that the economic rebound was “sustainable and likely to stay strong”.

It expects Malaysia to increase rates by another 25 basis points in the fourth quarter.

On Friday, South Korea’s central bank unexpectedly raised the key interest rate from a record low as it moved to restrain inflation in Asia’s fourth largest economy.

Bank of Korea governor Kim Choong-Soo and other policy-makers increased the benchmark seven-day repo rate for July from two percent to 2.25 percent—the first rise since August 2008.

The South Korean central bank had cut rates by a total of 325 basis points between October 2008 and February 2009 as the global financial crisis hit.

Cohen of Action Economics said Thailand was likely to raise interest rates soon following an end to street protests, with the Philippines expected to do the same by the end of the third quarter.


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