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Lending Rates Creep Up in Fast-Growing Asia
Source: startribune.com
Source Date: Saturday, July 10, 2010
Focus: Institution and HR Management
Created: Jul 12, 2010

Barring any surprises, interest rates in the United States and much of Europe look set to stay steady until next year. But in fast-growing Asia, the cost of borrowing has begun to creep up again.

South Korea on Friday became the latest country to raise interest rates from the lows of the financial crisis, joining a host of others in the region in gradually normalizing borrowing costs.

The increase was slight -- the key seven-day repurchase rate was nudged up by quarter of a percentage point, to 2.25 percent -- but the timing surprised many analysts, who had expected the Bank of Korea to hold fire until next month.

Less than 24 hours earlier, the central bank in Malaysia had also staged a quarter-point rate rise -- its third this year -- again surprising observers, who had mostly forecast no further move for the time being. The key overnight policy rate in Malaysia now stands at 2.75 percent

And last Friday, India announced an unexpected rate hike, its third this year. Vietnam, Taiwan, New Zealand and Australia also have started to return rates toward more normal levels, in Australia's case with a string of hikes that started last October.

Collectively, the moves are testimony to the region's economic strength. The Asia-Pacific region was spared major banking failures, and its governments and households are far less indebted than those in Europe and America. This, as well as stimulus spending and sharply lower interest rates last year, allowed the region to escape the global downturn relatively unscathed, despite a sharp drop in exports as global demand plummeted in 2009.

As a result, the region's developing countries could see growth of 9.2 percent this year, according to the International Monetary Fund's latest projections, published on Thursday. This compares with 3.3 percent and 1 percent, respectively, for the United States and Europe. South Korea last month raised its official growth forecast for 2010 to 5.8 percent, from 5 percent.

Fast growth has brought inflation pressures, and it is these that the region's central banks are seeking to combat with their gradual rate rises.

The Bank of Korea said Friday that although the economy was on track for solid growth, inflation threats were set to mount.

"Consumer price inflation has so far remained in a range of somewhat above 2 percent but a little below 3 percent," the central bank said in a statement accompanying its rate decision. But it added that "upward pressures are expected to build continuously" because of the continued upturn in economic activity.

The bank pledged to maintain an "accommodative policy stance" to aid the economic recovery, but some analysts projected further small increases could be in the offing.

"Pending the release of further guidance, we are inclined to keep our call for an August rate hike, for now," commented Wai Ho Leong, a regional economist at Barclays Capital in Singapore, in a note, citing the central bank's apparent concern with inflation, and continued strong growth.
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