Asia May Pare Back Rate-Increase Plans on Risks From European Debt Crisis

Asian nations may delay interest-rate increases as the European debt crisis roils global markets and threatens to undermine demand for the region’s exports, economists said.

 “Central banks in Asia will firmly be on hold,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. Policy makers will “have a greater tolerance of higher inflation.”

The crisis spreading from Greece complicates the outlook for policymakers in Asia trying to avert asset bubbles and overheating. China may delay gains in interest rates and the yuan, Barclays Capital said today, while Action Economics analyst David Cohen added that Malaysia, the Philippines and Taiwan could keep borrowing costs on hold.

In Australia, the central bank today underscored risks to the global recovery, saying that a “sharp slowing” of the world economy is possible. Australia raised rates as recently as three days ago.

Asian equities tumbled today after U.S. stocks plunged yesterday when computerized trading exacerbated a sell-off driven by concerns that Greece’s fiscal crisis may spread in Europe. The Shanghai Composite Index fell 1.3 percent as of 1:20 p.m. local time.

The Group of Seven plans to hold a conference call today to discuss the Greek crisis, according to Japanese Finance Minister Naoto Kan.

Chinese Policies

China has yet to raise interest rates after cuts to counter the global financial crisis, choosing instead to tighten reserve requirements for banks and targeting a reduction in new lending from last year’s record. The key one-year lending rate is 5.31 percent and the deposit rate is 2.25 percent.

Europe is the largest export market for China, accounting for about 20 percent shipments, so weaker demand and a depreciation of the euro versus the yuan would hurt the Asian nation, said Peng Wensheng, a Hong Kong-based economist with Barclays Capital.

The likelihood of China ending the yuan’s peg to the dollar this month, ahead of economic talks with the U.S., has “declined materially,” Peng added.

Not all economists believe rates will stay on hold throughout Asia. Alvin Liew, an economist at Standard Chartered Plc in Singapore, said today that he was maintaining a forecast for a 25 basis point increase by Bank Negara Malaysia next week.

“Unless something really goes wrong this weekend, we are unlikely to change our view,” Liew said.

Asia’s economic recovery, which is outpacing the rest of the world, is attracting capital inflows that may cause the region to overheat and lead to the formation of asset bubbles, the International Monetary Fund said April 29.

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

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