Moody's sees interest rates rising

Central banks in India, China and South Korea are closely monitoring the emerging inflationary pressures on their economies and hikes in interest rates could be expected across the Asia-Pacific region after Australia raised key interest rates, says Moody's economy.com.

Australia is the first G20 country to raise interest rates on Tuesday, with the country's apex bank declaring recession over. The Reserve Bank of Australia raised the official cash rate by 25 basis points to 3.25 per cent.

"The Reserve Bank of Australia's interest rate increase this week likely kicks off rate hikes across the region in coming months. Speculation regarding imminent interest rate movements in the Asia-Pacific region has been growing," Moody's economy.com, said in a report.

The ratings agency said apex banks in China, India and South Korea are keeping "a close watch on rising economic activity and emerging inflation pressures."

Moody's observation comes ahead of the Reserve Bank of India's quarterly review of monetary policy on October 27.

Inflation is already close to one per cent mark by third week of September and there are expectations that it may breach six per cent by the end of the current fiscal.

RBI Governor D Subbarao earlier this week said the central bank is faced with a dilemma whether to withdraw monetary stimulus or not since economic recovery is 'incipient' and inflationary expectations are there in the economy.

Moody's economy.com said as sentiment in global financial markets improves and signs emerge that global growth is resuming, it is inevitable that central banks in the region will raise interest rates from their current emergency levels.

It added that though the nascent recovery in domestic demand, industrial production and exports across the region is encouraging, uncertainty regarding the global economic outlook remains pervasive.

According to Moody's, gradually lessening the stimulus provided by monetary policy will be important in ensuring the sustainability of economic growth across the region and in keeping a lid on inflation pressures during the recovery.

However, the inevitable withdrawal of monetary policy stimulus measures will necessarily be gradual and measured, it added.