Asian central banks are using tailored policies to combat the threat from a flood of easy money, keen to avoid interest rate rises given that headline inflation and economic growth are expected to ease.
Many economies are awash in easy funds as central banks buy dollars generated by regional balance of payments surpluses which otherwise would push up the value of their local currencies.
To deal with the nagging problem, China and India have forced commercial banks to park more money with the central bank. South Korea and China are encouraging locals to invest more abroad, while Thailand has adopted more severe measures by placing curbs on foreign money entering the country.
"I think policy makers are looking for more direct means and direct tools to try to control liquidity," said Rob Subbaraman, senior economist with Lehman Brothers in Hong Kong.
"The problem with raising interest rates is that it affects the overall economy, so maybe it's not the appropriate policy given that inflation is so low and generally there is a concern about the export outlook." Only Indonesia and Thailand have cut interest rates in emerging Asia since a record-breaking rally in oil prices fuelled inflation globally and forced central banks to tighten monetary policy.
The cash flowing into banking systems has led to a surge in lending that central banks fear could find its way into the property or stock markets, sparking asset bubbles. "Consumer inflation is likely to stay benign in the region, but the main concern is that serious asset-price inflation may occur," said Wang Qing, economist at Bank of America in Hong Kong.
China's central bank has raised reserve requirements, or the amount banks have to deposit with the authority, four times in seven months to curb growth in fixed-asset investment and property. The Chinese Academy of Social Science, a top government think-tank, has urged Beijing to rein in the property sector to prevent a real estate bubble of the sort that crippled Japan's economy in the 1990s, the Xinhua news agency said last week.
"Before Japan's economy faltered in 1990, the yen appreciated, housing prices surged and the stock market boomed, just like China at the moment," the think-tank was quoted as saying by Xinhua.
Tim Condon, an economist at ING in Singapore, said China would probably have to raise reserve requirements again. "China seems on track to raise reserve requirements by 50 basis points every quarter," he said. "I think we will see that same tool being used elsewhere as well, depending on how intense the pressure gets."
Indeed, the rush of money into financial systems is becoming more of a priority for many central banks. "Liquidity has become more of an issue for China than inflation and even the Philippines is concerned about rapid money supply," Subbaraman said.
The Bank of Korea raised the reserve ratio on banks' short-term deposits in November to try to stabilise real estate prices. The Reserve Bank of India, frustrated by the failure of successive interest rate rises to put a brake on the bank credit fanning a property boom, changed tack in December by raising bank reserve ratios.
Central banks are more confident now that inflation is set to ease because oil prices have tumbled about 30 percent from July's record high of $78.40 a barrel. Many economists expect average inflation in Asia this year to moderate from an estimated 2.5 percent last year.
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