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.