Asia needs low interest rates amid recovery, ADB says

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Asia should keep interest rates low even as China, South Korea and other emerging economies in the region may grow at the fastest pace in three years in 2010, the Asian Development Bank said.

“Inflation is still low,” Jong-Wha Lee, the Asian Development Bank’s chief economist, told reporters in Manila Tuesday. “We haven’t seen a very strong recovery in the region. You need low interest rates to make recovery prompt.”

China, South Korea, Taiwan, Hong Kong and 10 Southeast Asia economies may expand 6.8 percent in 2010 from 4.2 percent this year as the global recovery spurs demand for the region’s goods, according to a report released Tuesday by the ADB’s Office for Regional Economic Integration in Manila.

Asia is leading the world’s emergence from its deepest recession since the 1930s after governments boosted spending, cut taxes and slashed interest rates, averting a spiral into another Great Depression. Growth could falter as the effect of stimulus measures fade and governments exit expansionary policies, the ADB division said.

“With the global recovery tentative, monetary policy should remain accommodative where feasible, with a watchful eye on inflation and asset prices,” the division said. “The recovery could falter if policy makers tighten too early, but tightening too late may lead to higher inflation and unsustainable fiscal deficits in the coming years.”

Confidence dips

Confidence in the world economy dipped last month as central banks’ actions to withdraw some emergency measures sparked concern about the strength of the recovery, a Bloomberg survey of users on six continents showed.

Some policy makers in Asia have started raising borrowing costs to contain accelerating inflation. The Reserve Bank of Australia increased borrowing costs a total of 75 basis points at its last three meetings and Vietnam raised its benchmark rate by one percentage point to 8 percent in November.

“Inflationary pressures appear to be well under control for the moment,” the ADB’s regional integration office said. “While recently showing slight increases, inflation is still expected to remain subdued as economies operate with excess capacity.”

Recovery in East Asia also hinges on the revival of growth in Europe and in the US, as this will affect the region’s export-dependent economies, the office said.

Weaker demand

“The deleveraging cycle is still in its early years, and if households in developed countries, particularly the US, save more than expected to repair their balance sheets, then weaker consumer demand will delay recovery in these economies,” the ADB division said.

Emerging East Asia groups China, the Southeast Asian nations of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Thailand and Vietnam, and the newly industrialized economies of Hong Kong, Singapore, South Korea and Taiwan.

Developing Asia, which includes economies such as India and Pakistan and excludes Japan, will probably expand 6.6 percent next year after growing 4.5 percent in 2009, the ADB said in a separate note Wednesday.

Source: Bloomberg

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