Fund managers offer mixed forecasts for Asia rate rises

Analysts and strategists at financial institutions largely agree that China's rapid GDP growth will continue this year despite likely continued monetary tightening by the government, following the 25-basis-point hike of its one-year lending and deposit rates on December 25.

Still, Dutch asset management firm Robeco is not convinced that Chinese interest rates will rise further.

The company expects GDP growth in China of around 9% for the coming year and says the Chinese government has ample room for additional stimulus if the economy unexpectedly slows.

However, although inflation has risen to around 3.5%, it is losing momentum and is not too far from the target rate of 3%, says Robeco, which suggests that “no more interest-rate hikes will be considered necessary”.

Yet New York-based Alliance Bernstein feels that China – and Asian countries in general – will continue to raise rates. “There is no denying that interest rates in Asia need to be normalised given that most central banks slashed their policy rates during the global crisis as aggressively as the US Federal Reserve,” says the firm in a 2011 economic outlook.

“There is no obvious need to accelerate monetary policy tightening, however, and, if our inflation assessment is correct, the current measured pace of normalisation should not put Asia at risk of falling behind the tightening curve.”

Alliance Bernstein suggests India will tighten the most rapidly, with a further 75bp increase in its policy rate in the next 12 months, with China also likely to raise its lending rate by 75bp on top of continued increases in banks’ reserve requirement ratios and increased bond issuance to mop up excess liquidity.

“The strength in the Chinese economy will give Beijing more confidence to deepen its current policy tightening,” adds the firm, “although we think the strength of the economy is such that market concerns about possible over-tightening in China are overstated.”

Meanwhile, Indonesia, Korea and Thailand are likely to raise interest rates by a further 50bp, believes Alliance Bernstein, but the rest of the region – particularly the Philippines and Malaysia – is “largely done with rate-tightening”.

Mirae Asset agrees that Chinese interest rates will continue to rise. “Rising interest rates will put pressure on highly-geared sectors such as independent power producers, utilities and airlines, but will benefit financials, especially insurance,” says the Korean firm in an outlook published in late December.

China will remain one of the fastest-growing economies in 2011, with GDP expected to grow at more than 8%, says Mirae, adding that the main drivers will be domestic consumption and investment and the net export contribution will continue to decline.

The firm sees consumer price inflation as a concern in the short term, but does not expect it to be a big problem, because food prices are likely to soften in the second half.

Analysts are mixed over exactly when any Chinese interest-rate rises might take place. Flemming Nielsen, senior analyst at Danske Bank, says his firm expects three additional 25bp hikes on top of the December 25 move and that they will take place in the first half of 2011.

But Aberdeen Asset Management said in a late-December outlook that aggressive rate hikes by Asian governments are not likely until the second half of next year, as central bankers prefer supporting domestic investment in the near term.