Asia needs to start raising interest rates to prevent inflation from accelerating and avert the formation of asset bubbles as the region’s economies recover from the global crisis, the Asian Development Bank said.
The region will probably expand 7.5 percent in 2010 after growing 5.2 percent in 2009, which was the slowest pace in eight years, the Manila-based lender said in its Asian Development Outlook report today. The 45 economies of developing Asia may grow 7.3 percent next year, the ADB predicts.
Asia is leading a recovery from the deepest global recession since World War II after the region’s governments pumped more than $950 billion into their economies through increased investment, tax cuts and cash handouts to boost growth. Some central banks are already raising borrowing costs or taking steps to remove the excess cash in their banking system to fend off inflationary pressures.
“As recovery takes hold, inflation pressures, particularly in asset prices, may well start to mount in the region,” the ADB said. “Unusually easy monetary policy throughout the region cannot be kept for too long, and there is a need to revert to a normal stance.”
Central banks in Malaysia, India and Vietnam have raised interest rates, while China has required banks to set aside more funds as reserves to drain money from the economy. Others, including Indonesia and South Korea, have left borrowing costs unchanged to buttress their recoveries.
Expansionary Stance
“While additional fiscal measures are unlikely to be implemented this year, monetary measures are expected to continue to support the recovery process by maintaining an expansionary stance,” the ADB said. “Authorities must choose the right timing to withdraw the exceptionally accommodative monetary stance. If the economy is susceptible to overheating, authorities should further tighten monetary policy.”
Asian stock markets and property prices are rising as investors seek assets for their funds. Inflation in the region will accelerate to 4 percent this year from 1.5 percent in 2009, the ADB forecasts.
“Because Asia is recovering more quickly and strongly than other parts of the world, the risk of an asset-price bubble is higher than elsewhere,” according to the report. “For developing Asian policy makers, asset price trends must be watched and preventive action taken before disruptive asset bubbles materialize.”
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