Asia to lead upward rate adjustments this year, says HSBC survey

MANILA, Philippines - Asian central banks are expected to make upward adjustments on interest rates ahead of their Western counterparts this year according to British banking giant HSBC.

HSBC chief economist Frederick Neumann said the forecast is based on the belief that the Asian region will lead the recovery of the global economy in 2010.

Rates are expected to move, mostly upwards, from 250 basis points (0.25 percentage point) to as high as one percentage point.

HSBC recently launched its largest survey on emerging markets economic data, called the Emerging Markets Index (EMI). The index reflected strong growth, suggesting that the emerging markets are likely to lead the global economic recovery.

“As the world’s economic center of gravity shifts from West to East, the economic strength of emerging markets will play an increasingly central role in the development of financial markets and international relations,” Stephen Green, group chairman of HSBC Holdings Plc., said in a report.

The EMI surged from 50.7 in the second quarter of 2009 to 55.3 in the third quarter, signaling the strongest quarterly increase in emerging market manufacturing and service output since the second quarter of 2008.

The index has rebounded sharply from an all-time low of 43.8 recorded in the final quarter of 2008 and 44.3 in the first quarter of 2009.

Neumann said Asia and the rest of the emerging markets have, to a certain extent, detached themselves from the struggling US economy.

“In the Philippines, however, the central bank (Bangko Sentral ng Pilipinas or BSP) will most likely make its move after the first semester,” Neumann said in an interview over CNBC.

The HSBC economist explained that the Philippines would be holding national elections in May this year, and that the US Federal Reserve is also expected to study the developments in the US economy in the first six months before taking any action on interest rates.

National elections and the events prior to the actual elections influence the economic conditions, mainly on the positive side, as campaign spending boost liquidity in the market.

Policy rates remained at an average four percent in 2009, but will start an upward climb to 4.75 percent in 2010 and 5.5 percent in 2011.

The peso is forecast to strengthen to 43.50 to a dollar in 2010 and 42.50 the following year.

Neumann said private consumption is also well and alive in Asia, boosting economies and outperforming Western economies.

 “Among the strong Asian economies, it is China that is doing well not only on the labor front but also in active government policy to encourage consumption,” the HSBC economist said.

 “It is more a matter of confidence than the actual recovery of the US,” he said. “But for the time being, I believe that Asia has de-coupled from the US.”