Asian central banks urged to hike rates

MANILA, Philippines - British banking giant Hong Kong and Shanghai Banking Corp. (HSBC) is urging Asian central banks to hike interest rates and tighten monetary policy. HSBC economist for Asia Frederic Neumann said the bank is concerned that inflation, asset bubbles and excessive investment would creep in on the region.

“Asian (monetary) officials should do what’s right and tighten up around here. They’ve played on the defensive for too long out of fear the US might buckle,” Neumann told FinanceAsia, a major regional publication.

He added: “The central banks in Asia most attuned to US growth risks are in Korea, China, Taiwan, Singapore and Thailand. But, the needle needs to be pushed back to neutral everywhere, quickly.”

Interest rates in the region are on average 150 to 200 basis points (bps) below neutral.

The bank economist said China, India and Indonesia need to act rapidly and stop small, incremental rate hikes.

He said the current global output gap would continue to restrain price pressures for the meantime. But a slack in agricultural production, which determines a third of Asia’s consumer price index basket, could change all that.

Neumann argued that higher interest rates would force an answer to the question of when a healthy rally ends and a bubble begins. Besides, bubbles never grow the same way and new avenues are frequently found to exploit the returns that cheap money offers.

“Regulators can only chase the obvious ones; everyone else will be hiding in the thicket quietly making their buck until duly exposed when interest rates eventually do begin to rise,” he said.

The HSBC executive, meanwhile, warned that cheap money leads to excessive investing. He pointed out that if rates are kept low too far into the recovery, investment grow at an unreasonable pace.

“Asia is especially vulnerable because cheap money encourages local firms to build empires and governments to race their countries towards the future, rather than channelling the focus into private consumption,” he told FinanceAsia.

The result might be excess capacity, which undermines returns and can shake the financial foundation of an economy.

“Whatever combination occurs, it is clear that the consequences could be dire if monetary accommodation persists on this scale. Rates need to go up,” he added.