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SINGAPORE -As Brazil, Russia and Turkey lift interest rates to ward off inflation and currency pressures, investors are beginning to prod Asia's central banks to follow suit, setting up a potential showdown with countries keeping rates at record lows.
South Korea and Indonesia, where central bankers have cut hard and downplayed the prospect of imminent tightening, are most firmly in the spotlight and interest rate swaps have raced to price in rate rises within a year.
Hikes in Thailand, Malaysia and India over the next 12 months are also in investors' sights and the danger is that the mood could force policymakers to choke off support sooner than they please, or risk capital flight and a currency selloff.
The moves also open a gap against benchmark U.S. short-term rates, which have barely moved and, now that Brazil, Russia and Turkey have made unexpectedly bold hikes, leave Asia's central banks lagging both their peers and the market.
While economists see a growing distinction between the risk profiles of Asian emerging markets and other more vulnerable blocs, they warn Asia nonetheless remains exposed to sudden shocks to global sentiment.
"Asia central banks now need to be a bit more cautious," said Sonal Varma, chief economist for Asia ex-Japan at Nomura in Singapore, with historically low rates in the region and "choppy" global capital flows.
"Some sort of additional compensation in terms of risk will need to be given," she said, especially in countries such as Indonesia where foreigners hold more than a fifth of government debt and the financial system is vulnerable to capital flight.
Bank Indonesia (BI) cut its benchmark rate by 25 basis points to 3.5% only in February, and yet swaps are already priced for about 50 basis points of hikes over the next 12 months, according to analysts at DBS Bank in Singapore.
Binay Chandgothia, a portfolio manager at Principal Global Investors, said while BI might need to hike rates if the rupiah weakens towards 15,500 per dollar, about 7% from current levels, the central bank probably has the room to hold a while.
"If they hike, they'll probably have to hike at least twice to bring stability," he said, which could dampen domestic growth before local demand finds a footing.
"Exports have been driving Asia, and I think the markets are beginning to think about the next leg - that's where domestic consumption and forced rate hikes are creating some sort of concern," he said.
Concern has also filtered through to emerging market stocks, which are lagging their developed peers, and currencies where dealers see a stronger dollar driving an increase in demand for options products to hedge against the risk of even further greenback gains.
Asia's central bankers have so far held firm, and, to be sure, a slew of investors and advisors think rates markets have run too far ahead.