Asia expected to maintain loose monetary policies

Asia expected to maintain loose monetary policies

SINGAPORE (AFP): Most Asian central banks are expected to maintain loose monetary policies in the short term to fuel economic growth despite interest rate hikes last week in the United States and Europe, analysts say.

Some are even banking on a drop in interest rates in Thailand, Indonesia and India and have forecast that rates in Hong Kong -- most vulnerable to US monetary tightening -- will still be at a modest level throughout 2000.

A key factor helping Asian economies maintain low interest rates is strong domestic liquidity, as many enjoy current account surpluses resulting from strong exports fuelled by weaker currencies.

"Regional interest rates cannot de-couple from higher global rates," ABN AMRO Bank said in a report released in Singapore at the weekend.

"But flush domestic liquidity and negative output gaps mean there will be some lag," it said.

The Dutch bank said Asian nations which had posted stronger economic recovery from the financial crisis triggered off in mid- 1997 would see money market rates rise sooner than others.

Britain's Barclays Bank said monetary policy in Asia would focus largely on domestic economic requirements.

Desmond Supple, senior economist with the Barclays Capital in Singapore, said the subdued nature of inflation despite robust regional economic growth suggested loose policy settings for most of 2000.

US investment house Merrill Lynch said while it expected some jitters in Asian asset prices with each US interest rate hike this year, the strong recovery in Asian growth and exports should make this a temporary phenomenon.

"An analysis of the profile of Asia's external sector leads us to believe that the region's economies are now showing greater resilience to interest rate shocks," said Bill Belchere, head of Merrill Lynch's Asia fixed income research and economics.

Belchere said Asia, with its impressive stock of external surplus, was well positioned to neutralise global interest rate increases.

"In essence, too much liquidity, not too little appears to be the immediate problem facing Asia, at least for the next few months," he said.

Last week, the US Federal Reserve raised its benchmark interest rate by 25 basis points to 5.75 percent, with analysts expecting several more increases this year to cool down rapid economic growth in the world's largest economy.

The European Central Bank also hiked rates by a similar margin to 3.25 percent.

Among Asian economies, Hong Kong remains vulnerable to higher US rates as its currency rate is pegged to the US dollar but analysts expect the territory's rate rise to be smaller than experienced in the United States.

"We expect Hong Kong dollar rates to remain at a modest discount in 2000 given flush domestic liquidity, domestic confidence in the peg and minimal risk of renminbi (Chinese yuan) devaluation," ABN AMRO Bank said.

It expects the central Bank of Thailand to cut rates by up to 50 basis points from current levels in the first half of 2000 -- against its previous view of stable rates over the period -- to boost economic recovery and lower the domestic debt burden.

Barclays Capital's Supple said monetary policy in Thailand would actually be eased throughout 2000 "to support a disappointing economic recovery."

He expects rates in Singapore, Taiwan and South Korea to remain around current levels in the first of 2000, with only gradual increases expected in the second half.

ABN AMRO forecast Singapore's three-month interbank bank rate, the level at which banks borrow from each other, to rise about 50 basis points to three percent by June and South Korea's short term rates to drift up soon after April's parliamentary elections.

In India and Indonesia, rates could still decline given modest inflationary pressures, it said, cautioning however that political uncertainty in Jakarta could constrain the magnitude of decline for Indonesian rates.