[lkarren]

Tighter monetary policies in Asia needed to stem liquidity, inflation
By Jeana Wong, Channel NewsAsia | Posted: 05 July 2007 2050 hrs


Foreign currencies displayed on a glass panel

SINGAPORE : It's been 10 years since the start of the Asian financial crisis, which saw many regional currencies going into a tailspin. But they have since rebounded and are now poised for further upside.

Still, some analysts are calling for tightening of monetary policy in the region, citing concerns about runaway inflation and liquidity.

While Asian currencies have rebounded from the sharp falls in the late 1990s, most are still below their peaks before the financial crisis hit.

Economists said countries which still manage their currencies at artificially low levels could have done more, especially during recent boom years.

"Last year and this year are the periods where you have to think what you can do in changing it. It's not clear whether in coming years, where growth is slower and you don't have the kind of reserves and surpluses that you're enjoying now... if you'll still have that opportunity," said Hans Timmer, manager of Global Trends, Development Prospects Group, The World Bank.

But there were others who argue that there was no real catalyst for change.

Thio Chin Loo, senior currency analyst at BNP Paribas Corporate & Investment Banking, said: "The inflation parameters over the last few years have been very friendly. So as a result, there hasn't been a great reason or justification for central banks to tighten monetary policy.

"In some ways, you can't say that central banks have been wrong in not tightening too much... Financial markets have showed that, at least, central banks could be seeing things correctly."

Still, relatively cheap Asian currencies and low interest rates due to loose monetary policies are causing excess liquidity and credit growth worldwide.

Analysts said that could lead to asset bubbles, or worse, draw investors to riskier assets.

"Over the last one or two years, with the growth in Asian economies, the capital has been flowing into riskier assets such as bonds and stock markets, which are perpetuating the rise in Asian currencies. So the danger therefore lies there, when more capital may get attracted to risky assets," said Thio.

"And if things turn for the worse, as you've seen through the Asian crisis, capital flee the Asian region fairly quickly as well," she added.

Analysts said there is a general consensus that central banks in Asia are managing their currencies too much.

They added that central banks can afford to let their currencies appreciate more to balance out trade surpluses.

Callum Henderson, head of Global Research FX Strategy at Standard Chartered Bank, said: "As a whole, monetary policies still has further to go in terms of being tightened, and risk-free rates to go up further. But there are one or two exceptions.

"In Asia, for instance, Thailand is clearly and completely inappropriate to tighten monetary policy right now. Indonesia has been cutting interest rates for some time."

The Monetary Authority of Singapore manages its monetary policies through currency rather than interest rates.

Over the last two years, it has allowed for a gradual and modest appreciation of the Singapore dollar.

Analysts said this view is likely to stay. - CNA /ls

[genzo2106]

well given the huge impact the last economic crisis had created, tighter monetary policies are a must have

[id_peace]

Singapore will be hit harder than before if the crisis comes in again...