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Asian countries need to raise their interest rates to shield their economies from the ill-effects of inflation and brewing asset bubbles, said Mr Chi-Won Yoon, co-Chairman and co-CEO of UBS Asia Pacific addressing a select group of journalists on Thursday at a sponsored event in Hong Kong.
Pointing out that the Asian economies had “shared” monetary policies with the developed world for many decades now, he suggested that the low or near zero interest rates worked well at a time when the primary objective for many of these economies was to keep their exchange rates low and exports competitive.
However, now that Asia has proved quite resilient to the crisis in 2008 and that the region's economies continue to grow strongly, the very different economic circumstances and fundamentals of Asia now demanded that these countries “wean” away their monetary policies from those of the developed world.
Failing this, Asian economies could not reach their next level of growth. In fact if such bubbles were allowed to continue, they could lead to the next recession, he warned.
Asked about whether India too needed to raise interest rates further, after the significant policy rate hikes in recent months, Mr Chi-Won Yoon made the point that the problem was about real interest rates, the interest rates net of inflation, being very low or negative in most Asian countries.
Higher interest rates may have an adverse impact on manufacturing or on exports, but are necessary to fight inflation and curb “asset price bubbles” particularly in the property market, he said.
With much of Asia facing a problem of plenty on capital flows, would higher interest rates exacerbate the problem?
Mr Chi-Won Yoon suggested that this problem could be tackled through a graduated approach to interest rates and a “more flexible” currency regime.
“I'm not suggesting that countries go ‘cold turkey' immediately. This (delinking of monetary policy from the developed world) needs to be done over many years”, he said. Mr Chi-Won Yoon spoke at the UBS Asia Pacific Media Forum 2011.
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