http://www.businesstimes.com.sg/sub/...43310,00.html?

Published June 15, 2011

DBS expects more rate increases in Asia this year

There is also a 50:50 chance of MAS tightening monetary policy in October

By EMILYN YAP


INFLATION may be moderating in some Asian markets but central banks should not be letting their guards down, said DBS managing director of economic and currency research David Carbon.

His research team expects another 20-25 interest rate hikes in the region by year-end, and a '50:50' chance of the Monetary Authority of Singapore tightening monetary policy in October.

'If central banks don't finish the job . . . then real interest rates will remain too low, nominal growth will remain too high and inflation will take off again by early 2012,' he said.

DBS's views come at a time when price increases in some Asian economies seem to be slowing slightly. In Singapore, the consumer price index rose 4.5 per cent year on year in April - down from 5 per cent in March - prompting talk that headline inflation had peaked. In Korea and Indonesia, too, inflation in May was lower than that a few months ago.

But Mr Carbon pointed out that much of the easing is due to the base effect.

'The worry is that central banks become complacent as and when inflation drifts gently lower over the remainder of this year. That could cause some to pat themselves on the back and think the job is done when in fact it's last year's high base that has done most of the work,' he said.

Also, some markets are still witnessing rising inflation.

According to fresh data yesterday, consumer prices in China climbed 5.5 per cent year on year in May, exceeding April's 5.3 per cent and setting a new high since mid-2008. Inflation also picked up in May in other countries such as Thailand and the Philippines.

With inflation eating away at nominal deposit rates, real rates have entered negative territory in markets such as China, Singapore and Hong Kong, DBS found. In Singapore, the real three-month time deposit rate is a negative 4.3 per cent per annum.

Such a situation could cause inflation to rear its head again and DBS expects central banks in the region to introduce more rate hikes in the rest of the year. For instance, another four rounds in Thailand, and three rounds each in Indonesia, Taiwan and India could be on the cards.

In fact, the People's Bank of China announced a 50-basis-point increase in the reserve requirement ratio yesterday after the latest inflation figure was released. There is a '50:50' chance of MAS letting the Singapore dollar appreciate further in October to counter rising prices, Mr Carbon said.

'Inflation is falling and people are thinking that there's less of a chance,' he said, but more tightening could happen if inflation continues to 'march forward'.

Asian currencies are likely to continue appreciating against the US dollar, 'partly on the structural idea of strong growth and partly on the cyclical aspect that interest rates in the G3 will remain below average'.

DBS expects the greenback to be worth $1.19 by the end of the year and $1.17 by Q2 2012. One US dollar bought $1.232 yesterday evening, according to Bloomberg data.