The United States Federal Reserve Board is projected to raise interest rates to 5 per cent by Q2 this year, followed by a subsequent rate cut to 4.75 per cent in Q4 this year, according to Dr. Andrew Freris, Chief Economist & Head of Fixed Income Research, BNP Paribas Asia Pacific.
The impact of higher USD interest rates in Asia will be muted except for Hong Kong where rates can be expected to, eventually, match the increases in USD rates, according to Dr. Freris. Asian central banks have not been following the Fed interest rates policies but manage interest rates to suit their own domestic needs and considerations. Except for Hong Kong, Asian short term rate cycles are largely decoupled from that of the USD.
The European Central Bank is expected to raise rates to 3.25% by 3Q this year while the Bank of Japan will begin to raise rates too in 4Q. The G3 interest rates cycles are, therefore, completely out phase with USD rates declining at the time that G2 rates will be still increasing.
Asian economies, other than Hong Kong, where rates may increase, include South Korea, Taiwan and Thailand where political uncertainty could pressurize the Thai Baht and, hence, rates. In Indonesia once inflation has clearly peaked, the decline in rates could be quite rapid.
Inflation is Asia is expected to remain subdued in 2006 compared to 2005 and this, coupled with the peaking of Asian short term rates after first-half 2006, will help keep yield curves flat for now, Dr. Freris continues.
On the credit side, most Asian corporate and sovereign USD bonds performed well in the last six months. However the narrowing of spreads is now reaching its limit for a number of reasons including the fact that high grade names are sensitive to higher interest rates and the piercing of sovereign ceilings by corporates led to overpricing and volatility. Investment recommendations include selected emphasis on high yield rather than on high grade names.
Dr. Freris continues to recommend, on a selective basis, high yielders to high grades, and to expect that cash bonds will outperform Certificate of Deposits.
Corporate Communications Manager,
BNP Paribas, North & East Asia
Tel: +852 2909 8847