South Korea joins regional rate rise

Asian countries have raised their interest rates as concerns over inflation and asset bubbles heighten.

In late 2008 and early 2009, interest rates had remained at record lows as countries feared waning global growth.

South Korea is the latest major Asian country to raise its interest rates as concerns over rising inflation override those of weakening global growth. (article continues below)

Elsewhere, China decided to up a benchmark money-market rate, boosting lenders’ reserve requirements. Although the reserve requirement is not an interest rate rise, the move will drain cash from the financial system to limit inflation and asset-bubble risks in China.

China is becoming increasingly worried about its overheating economy. Kevin Grice, a senior international economist at Capital Economics, is among those who expect another rate hike in China.

Malaysia started raising its interest rates before any other central bank in Asia this year to reduce the risk of financial imbalances. The country is expected to be the next country in the region to raise interest rates again, followed by, among others, the Philippines and Taiwan.

Grice says India is unlikely to raise its interest rates soon, following a hike earlier this month, but it has struggled to combat stubbornly high inflation for some time.

According to Grice, inflation in Asia peaked two to three months ago but is rising again, mainly following a significant increase in food prices.

“Many countries have been expanding strongly and are hitting their capacity constraints,” he says.

“Together with rising food prices, this is causing inflation to rise.”

More quantitative easing by America may also contribute to raising inflation, although Grice says food prices are the main driver.

Elsewhere in the region, Australia and Vietnam, which has one of the highest interest rates worldwide, have also tightened their monetary policies to fight inflation and prevent asset bubbles.