By Shamim Adam March 3 (Bloomberg) — Asian policy makers risk creating asset bubbles and fueling inflation by keeping interest rates “too low for too long” in their attempts to boost domestic demand, Standard & Poor’s said. Fiscal and monetary stimulus, along with an improvement in the U.S. and Europe, and China’s “locomotive” economy have helped strengthen the region’s recovery, economists led by Dharmakirti Joshi wrote in a report released today. Asia is leading a global recovery from the worst slowdown since World War II, prompting the region’s central banks to start removing some emergency steps taken to counter the slump. Policy makers in China, India and Vietnam have tightened monetary conditions amid signs that accelerating growth is fueling inflation and increasing the risk of asset bubbles. “Although Asia-Pacific economies will continue to face the challenge of offsetting slow external demand by creating enough domestic demand for local goods, keeping interest rates low for too long, or bringing in further fiscal stimulus, could create heightened inflationary risks, asset price bubbles, and fiscal worsening,” the S&P analysts said. Asset bubbles are starting to appear in Asia, where stock and property markets are looking “frothy,” David Wyss , an economist at Standard & Poor’s, said in a conference call today. Australia’s central bank yesterday resumed raising interest rates after a one-meeting pause amid a booming jobs market, rising home prices and a rebound in confidence. Monetary Tightening S&P said it expects monetary tightening this year in South Korea , Hong Kong and Singapore, where asset-price volatility is becoming a concern. India and China will also further tighten policy, according to the report. In Japan, where the recovery is lagging behind the rest of the region, such a move is less likely and further policy support will be needed to mitigate recessionary conditions, the analysts said. China, India, Vietnam, and Indonesia will continue to “lead the pack” in economic expansion in 2010, S&P predicts. It said China’s “robust” recovery and strong domestic demand have spurred imports from the rest of the region. “The overall improvement in the Asia-Pacific’s economic performance is coinciding with a gradual, albeit patchy, stabilization of the global financial and economic system,” the economists wrote. “In our view, this situation warrants careful policy configuration.” Growth Risks Risks to Asia’s growth include inflationary pressures and the sustainability of the recovery in the U.S. and Europe, according to the report. “Inflationary concerns remain, due to oil and commodity prices and higher asset prices,” the economists said. “Higher inflation may inspire faster rate hikes, which may in turn jeopardize the pace of the growth rebound. Inflation may also deter recovery in private investment.” Most Asian governments will probably shift from “crisis management to ongoing recovery management” this year and this will affect funding costs, S&P analyst Ian Thompson said in the report. “This shift will likely entail moderating expansionary programs, raising official interest rates, and gradually withdrawing fiscal stimuli to avoid asset-price inflation,” Thompson said. “This will necessarily have a negative effect on funding costs for the corporate, infrastructure, and financial institutions sectors, and runs the risk of stalling recovery if poorly executed.” To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
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Asia Risks Asset Bubbles Due to Low Rates, China `Locomotive,’ S&P Says
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