Asia - Central banks put to the test (Feb 08)

Asia as a whole is in good shape to weather a global slowdown this year, but the contraction in Singapore’s GDP at the end of 2007 underlines that smaller, tradereliant economies will suffer as demand growth elsewhere in the world slows. The US Fed’s aggressive rate cuts leave some – notably Thailand, where domestic demand remains subdued – with little option but to respond in kind. Elsewhere, central banks would be forgiven for not knowing which way to turn. Still-high oil and food prices are pushing up headline inflation. And although international investors are cautious now, widening interest rate differentials and strong growth in domestic demand threaten to draw in a wave of liquidity which could further inflate asset prices. The outlook for regional interest rates therefore looks increasingly uncertain.