Monetary tightening in Asia may be put on hold

American banking giant Citigroup sees the “crisis of confidence” in the United States and Europe gnawing at Asian economic growth and prompting most central banks, including the Bangko Sentral ng Pilipinas, to pause on their monetary tightening cycle.

Citigroup has downgraded its 2011 economic growth forecasts for Singapore (5.7 percent from 7 percent), Malaysia (5 percent from 5.7 percent), Korea (3.9 percent from 4.3 percent) and the Philippines (4 percent from 4.6 percent).

Based on its Asia Macro research dated Aug. 12, written by a team led by chief economist for Asia-Pacific Johanna Chua, Citigroup said the crisis was increasing downside growth risks, especially via trade. “While Asia’s economic data has been holding up relatively well, with resilient domestic demand and a surprisingly strong bounce in July exports, the downside risks to growth in both the United States and Europe on what we view as a crisis of confidence on policy has grown,” it said.

It said growth forecasts in Taiwan and Hong Kong could still be vulnerable while its Thailand growth forecast this year was already well below consensus at 3.6 percent.

“There is still a high degree of uncertainty in our forecasts given the evolving situation in the developed markets,” the research said.

Trade was seen as the primary area in which Asia would likely be affected. The more open and export-driven the economies are, the more vulnerable they are, it said.

“Asian central banks are now most likely to pause from here until we see clarity in economic outcomes,” the Citigroup research said. “We expect China, Indonesia, India, Korea, Malaysia, Philippines and Taiwan to keep policy rates on hold.”

In the case of the Philippines, the BSP has so far raised its overnight borrowing rate by 50 basis points to 4.5 percent and the reserve requirement on banks by 2 percentage points this year.

Citigroup noted that Asia’s inflation momentum has been waning, though relative to expectations, the outcome has been mixed. As of July, it noted, only China and Korea surprised on the upside driven by higher food and fuel prices.

However, Citigroup noted that inflation in other countries such as Indonesia, Philippines and Thailand proved relatively stable to benign while Taiwan’s inflation reading was on the downside.

“The 9-percent drop in Brent crude prices and about 6 percent drop in the commodities futures over the last month are supportive for central banks pausing,” it said.