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Asian Stock Markets Wrong to Price In Rate Cuts: Expert

Despite fears of another financial crisis, Asia faces a bigger risk from higher inflation and hot money flows than from a slowdown in domestic demand, says one expert.

Interest rates
Interest rates

Frederic Neumann, Co-head of Asian Economic Research at HSBC says the recent sell-off in stocks is creating a disconnect between markets and policy makers in the region.

That disconnect is most pronounced in Australia and South Korea where stocks are pricing in interest rate cuts, he adds.

“It doesn't seem likely from an economic perspective that cuts will be coming through anywhere across Asia,” says Neumann. “If anything hikes are more likely than cuts.”

According to the HSBC economist, price pressures in Australia remain elevated and even the Reserve Bank of Australia (RBA) has said inflation will probably come in at the top end of its range of forecasts for the next two years.

In the case of China, Neumann says despite fears of slowing growth, recent data especially on retail sales have been extremely positive. In July, for example, retail sales grew by 17.2 percent to $222 billion from a year earlier.

Neumann believes the U.S. Federal Reserve’s easy money policies will continue to fuel inflationary pressures in Asia as more funds flows into the region given the strong growth environment.

“We're back to our old problems of the last two years,” he says.

“The trick is how do you respond to that? Because if you raise interest rates, you pull in even more capital and I think that's where again the risk of policy restrictions is coming in."