Another US rate rise will hurt Asian economy: UN

Singapore, March 30 | Updated: Mar 31 2006, 05:30am hrs
Asias economic growth could be cut by half a percentage point next year if US interest rates rise another quarter point to 5%, the United Nations Asian economic research unit said on Thursday.

The US Federal Reserve raised its benchmark interest rate to 4.75% on Tuesday, its 15th straight increase since it began monetary tightening in June 2004, saying rates may go higher yet.

Kim Hak-Su, the executive secretary of the UN Economic and Social Commission for Asia and the Pacific, said there is a time lag of 18 months for higher US rates to impact Asian economic growth.

The Fed may raise rates to 5 percent by the third quarter. It will have major repercussions across the world and in Asia, Kim said at a briefing in Singapore on the UNs 2006 outlook for Asia.

He said the US has had to raise rates to keep attracting foreign investment to offset its current account deficit.

Kim said economic imbalances caused by a record US current account deficit could only be solved by a rise in US savings rates and with Asia putting more of its investments within the region.

Forcing Asian currencies to appreciate, as demanded by some US politicians, would not solve the imbalance. The UN study showed that even if Asian currencies rose as much as 33 %, the US current account deficit would only fall to about 3% of gross domestic product within a year from 6%. Under this scenario, Asias current account surplus as a ratio of GDP would deteriorate by 2.4 percentage points and economic growth would slow by 2.6 percentage points, with Singapore, South Korea, Indonesia and China worst hit. Thats clearly not feasible.

Asia cannot keep subsiding the American economy with its savings. The real challenge is does America have the political will to reduce global imbalances, Kim said.