HONG KONG: Optimistic sentiments about the prospects of economic recovery are increasingly evident, the latest evidence of this including Australia's becoming the first major economy to raise interest rates since the global economic turmoil began last year. Closer to home, HSBC upgraded its economic growth forecast for Hong Kong, while the city's benchmark Hang Seng Index soared to a two-week high yesterday. On Tuesday, The Reserve Bank of Australia raised its cash lending rate from 3 percent to 3.5 percent in response to economic recovery signs.

Is this the beginning of a general shift in monetary policy as central bankers in Asia-Pacific region begin to prepare for economic recovery? Economists have contrasting predictions.

Hong Kong's monetary authorities will not make any changes in the foreseeable future, nor will its counterparts in the rest of the region, said James McCormack, managing director of Asia Pacific sovereign ratings at Fitch Ratings.

"It is more important to see US monetary policies. The link system has limited Hong Kong with no flexibilities," McCormack said.

Asia will continue to wait for the US Federal Reserve to make any changes, he added.

Irina Fan, senior economist at Hang Seng Bank, predicts that the Fed may increase interest rates by the third or fourth quarter next year and that Hong Kong will not tighten credit until then.

"The city's economy relies too much on external trade, given that US consumers are still very cautious about spending; the country's saving rate is growing," she said.

The global economy is expected to gradually recover, but the pace of expansion will be sluggish. The highly trade-reliant Hong Kong economy is not likely to make big gains, as it will no longer be easy selling to US consumers who are becoming more frugal, and domestic demand may not be able to push growth to decent levels, Hang Seng Bank said in a report.

At present, the only clear message from the US is that the giant economy has scaled back emergency credit programs, i.e., monetary stimulus has come to an end, Fan said.

HSBC, which has raised its economic growth forecast for next year for Asia, excluding Japan, thinks interest rate hikes are likely to come sooner in some Asian countries and areas.

Europe's largest bank has predicted that Korea and Taiwan will be next, raising their rates in the first quarter of next year, with the mainland, India, Indonesia, the Philippines, Vietnam and Thailand following suit in the second quarter.

"Besides continued strength in consumption and investment, we expect to rebound over the coming quarter, driven by restocking in the West and inter-emerging markets trade," HSBC economists Robert Prior-Wandesforde and Frederic Neumann wrote in a report.

All economists agree that Australia, unlike other big, rich economies, hasn't really fallen into recession. It weathered the financial storm and is still enjoying good economic conditions, partly thanks to China.

Fitch Rating's McCormack thinks Australia's economy is in a "different circle", and the trading position with China has played an important part in Australia's growth story.

"While China's trade with the US and Europe continues to post a surplus, the country is buying [more heavily] from Australia," he said.

China is now Australia's largest trading partner. Exports of raw materials are strong; minerals have grown from 20 percent of Australia's exports to more than 40 percent in the past decade.

Moreover, Australia's banking system has held up well, with some national banks posting healthy profits during the financial crisis, in some measure because they avoided sub-prime lending.

(HK Edition 10/08/2009 page4)