Southeast Asian economies have entered into a phase of interest rates hikes as central banks try to combat intensifying inflation.

Tao Dong, an economist at Credit Suisse, said inflation will remain a primary concern throughout Asia. He estimated that central banks in the region will increase interest rates between 25 and 75 basis points in the next few months while adopting a wait-and-see attitude.

"Energy, commodities and food will continue to inflate, driven by the structural increase in demand," Tao said.

He said that the economies in the region, excluding the mainland, South Korea and Taiwan, will adjust their rate policies this year.

Vietnam is among the Asian countries facing the growing inflation concern. The country's stock market plummeted in recent weeks as Vietnamese banks raised interest rates. The increases came after the central bank removed a 12 percent ceiling on dong deposit rates and raised three other key rates.

Tao warned that China should learn from Vietnam's experience, as the country has failed to manage excess liquidity that has caused a recent correction after a breakdown of asset bubbles.

"It is a warning alarm for China, as the two countries are facing similar situations," Tao said. "It will take 5 years for Vietnam to fix the problem, but the crisis is manageable as the stock market is allowed to fall only 2 percent per day with the controlled depreciation of the currency."

"Excess liquidity will remain a problem, but it is very difficult for China to control the inflow of hot money, as it comes through underground channels," Tao added, noting that inflation is still a more concerning problem at the moment.

Tao said China is unlikely to raise interest rates in the short term after increasing its reserve ratio last week, because that would attract more hot money into the heated economy.

The economist predicted that that the mainland's CPI growth will be 7.5 percent this year, and it will grow to 8.5 percent in 2009 behind significant wage increases.

Alarm for Hong Kong

For Hong Kong, Tao believes that the interest rate has already bottomed out, but the trend will largely depend on the United States' rate. Given the moving HIBOR and LIBOR, the mortgage costs for Hong Kong banks will likely increase by 25 basis points.

Yet, Credit Suisse estimates that Hong Kong property prices still have an upside of up to 5 percent this year, and GDP growth will stay at 5 percent.

DBS has also predicted that economic bodies throughout Southeast Asia will increase their interest rates by the end of the year.

Vietnam is expected to jump the most, from 14 to 16 percent, while Indonesia, Malaysia, the Philippines and Thailand will increase their interest rates by between 50 and 75 basis points, on average, according to DBS estimates.

(HK Edition 06/13/2008 page2)