The interest rate cycle has turned in the Asia-Pacific region, but increases in benchmark borrowing costs will be gradual in order not to nip fragile economic recovery in the bud, analysts say.
Australia’s surprise quarter-point hike in its key cash rate to 3.25 percent last week “crystallized the fact that the tide of monetary policy” has switched course, said Matt Robinson, an economist at Moody’s Economy.com.
The move by Australia — the first major economy to boost borrowing costs since the global financial crisis began — “likely kicks off rate hikes across the region,” but monetary tightening will be gradual, Robinson said.
Even though Australia, its economy stoked by exports to supply China’s keen resource appetite, has been quick to start unwinding monetary stimulus, most analysts believe the next rate rises in the region will come next year.
Central bankers in emerging market giants India and China and elsewhere in the region are keeping a wary watch on indicators pointing to rebounding economic strength and resurgent inflationary pressures.
Low-cost loans have provided a vital stimulus, and policymakers are fearful of choking nascent growth by hiking rates too soon and too fast.
“It’s a tough decision at this juncture to know how to unwind all the monetary stimulus — when to time the stimulus exit,” said Dharmakirti Joshi, principal economist at leading Indian ratings firm Crisil.
Analysts had bet that South Korea, recovering from the global slowdown faster than many other nations thanks in part to an export rebound, could be next to jack up rates. Some had forecast the hike could come as early as next month.
But last week South Korea’s central bank kept its benchmark rate unchanged and said it needed more time to assess the economy’s underlying strength.
The “less hawkish” tone of the South Korean central bank’s comments suggested that there would only be a “gradual and moderate tightening in 2010,” Goldman Sachs economist Goohoon Kwon said.
In India, tipped by some analysts as another country likely to tighten monetary policy sooner than others due to an inflation flare-up, the government has argued that raising rates too early could stall economic recovery.
Reserve Bank of India Governor Duvvuri Subbarao acknowledged the challenge last week, saying the bank must manage “the trade-offs” between buttressing growth by holding down borrowing costs and keeping a lid on inflation.
China also looks set to keep rates on hold until next year, many analysts say.
“Since inflation is not an immediate threat and the external outlook remains precarious, we do not think consensus can form quickly to allow an overall tightening of policy,” UBS economist Wang Tao (王濤) said recently in a note.
For the rest of the Asia-Pacific region, from Taiwan and Singapore to Thailand and Indonesia, most analysts are wagering the first rate hikes will be next year.
The withdrawal of monetary stimulus will be slow to ensure recovery remains on track, especially with the US and many European economies yet to emerge from recession and Japan, the biggest economy in Asia, still feeble.
“Raising rates may snap the green shoots. This is not a good moment to do so,” said Norman Yin (殷乃平), a banking professor at National Chengchi University in Taipei.
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