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Asia Dragged Down by Europe’s Crisis Forced to Hold Rates as Prices Climb

Europe’s failure to end a deepening debt crisis and a faltering U.S. recovery are escalating the danger of a growth slowdown in Asia, putting pressure on central banks meeting this week to refrain from interest-rate increases.

Central banks in South Korea, Malaysia, Indonesia and the Philippines will probably all keep their benchmark rates unchanged tomorrow, according to four Bloomberg News surveys of economists. Bangko Sentral ng Pilipinas and Bank Negara Malaysia will also refrain from increasing banks’ reserve requirements after raising the ratios earlier this year, according to separate surveys.

World Bank President Robert Zoellick said yesterday the world is “moving into a dangerous period” as stocks extended a slump that has wiped $6.6 trillion off global equity values in the three months ended Sept. 5. Inflation may limit the scope for stimulus in Asia as expansions slow from China to Malaysia.

“Lingering inflationary pressures will prevent central banks from easing rapidly, which can potentially pose a challenge,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. “While central banks in Asia will likely stop tightening, no one will pull a Brazilian and chop interest rates either,” he said, referring to Brazil’s rate cut last week.

RBA Signal

Reserve Bank of Australia Governor Glenn Stevens signaled today a willingness to keep rates on hold while the nation’s consumers retrench and global financial markets create instability for the “foreseeable future.”

“Periods of sudden increases in anxiety within international financial markets are moments when, if at all possible, it is good to be in a position to be able to maintain steady settings,” he said in prepared remarks in Perth.

Stevens held rates at 4.75 percent yesterday for the ninth straight meeting. A report today showed Australia’s economy expanded 1.2 percent last quarter from the previous three months, when it fell a revised 0.9 percent.

Deutsche Bank AG Chief Executive Officer Josef Ackermann said this week conditions in the stock and bond markets are reminiscent of the financial crisis of late 2008, when the collapse of Lehman Brothers Holdings Inc. in September of 2008 froze credit markets and forced taxpayer-funded bailouts of banks from Washington and London to Berlin.

Korean Decision

Bank of Korea Governor Kim Choong Soo and his board will hold the seven-day repurchase rate at 3.25 percent, 14 out of 18 economists surveyed by Bloomberg News predicted, while four expect an increase to 3.5 percent. Gross domestic product grew 0.9 percent in the second quarter from the previous three months, when it advanced 1.3 percent.

“What looked like a soft patch seems to be a much softer global recovery path,” said Erik Lueth, a Hong Kong-based economist at Royal Bank of Scotland Group Plc. “Given its reliance on U.S. and European economies, this is bound to affect Korea. I no longer expect interest hikes in 2011 and 2012.”

Still, South Korea would have to “normalize” monetary policy to fight inflation unless the global economy returns to recession, Kim said last month. Consumer prices in South Korea rose 5.3 percent last month from a year earlier, the biggest gain in three years, even after policy makers boosted borrowing costs three times this year and the government implemented price controls.

Emergency Meeting

President Lee Myung Bak held an emergency cabinet meeting on July 20 to discuss ways to contain inflation after his approval rating dropped. The Kospi stock index plunged 12 percent in August, the biggest monthly drop since the global financial crisis in 2008, and extended losses this month. The won has declined 0.6 percent against the dollar this month.

LG Display Co., the world’s second-largest maker of liquid- crystal displays, may cut spending next year as slowing flat- screen television sales damp demand, Chief Executive Officer Kwon Young Soo said last month. Samsung Electronics Co. posted an 18 percent profit drop from a year earlier last quarter.

Bank Indonesia will keep its key rate at 6.75 percent, according to all 10 economists surveyed, even after growth in consumer prices accelerated in August for the first time in seven months. The government doesn’t see an urgent need for the central bank to adjust its reference rate, Bambang Brodjonegoro, head of fiscal policy at the finance ministry, said last month.

“The central bank doesn’t just look at the inflation factor but also economic growth to decide on interest rates,” said Felix Sindhunata, an economist at PT Henan Putihrai in Jakarta. “This month, BI will hold the rate unchanged to keep the economic growth momentum.”

Philippine Rate

Bangko Sentral ng Pilipinas will maintain its benchmark rate at 4.5 percent for a third straight meeting, all 15 economists surveyed predict. Bank Negara Malaysia will hold its benchmark rate at 3 percent, according to all 18 economists surveyed by Bloomberg.

Inflation in the two Southeast Asian economies is easing after policy makers raised borrowing costs and banks’ reserve requirements earlier this year.

Monetary policy will be “supportive of growth” on signs inflation pressures have moderated, and the central bank doesn’t see an urgent need to adjust its policy stance, Philippine central bank Governor Amando Tetangco said yesterday.

Malaysia’s economy grew at the slowest pace since 2009 last quarter, and central bank Governor Zeti Akhtar Aziz said last month the benchmark overnight policy rate at 3 percent remains supportive of growth.

The Bank of Thailand was split at its Aug. 24 meeting with two out of seven members saying risks of a global recession and the impact on the Thai economy was “material enough” to justify a pause. Still, the central bank raised its policy rate for the seventh straight time to 3.5 percent as the rest of the members viewed domestic inflation risks as remaining elevated, according to its minutes released today.

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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