The inflation war in the region is far from over. Economists say that is because Asia is a primary importer of liquidity from the West, recently termed "QE2". 

But the question is, with rising inflation and strong liquidity inflows, will regional economies be able to keep dancing once the liquidity stops. 

In Asia, money has been gravitating towards assets, including properties. 

This has caused concerns of asset bubbles forming, and policy makers in the region have stepped in to take action. 

Experts noted that the liquidity has trickled down also to food and service prices in the first half of this year. 

Economists at United Overseas Bank are forecasting that inflation will grow by 3.8 per cent on-year in Singapore in the first quarter of 2011, and 4.9 per cent in China. 

Inflation is expected to continue in that region for the rest of the year. 

Jimmy Koh, first vice president and head of research & investor relations, UOB, said: "To put in a different perspective, this part of the world is enjoying the fruits of the last ten years, twenty years, where we restructured the balance sheets of corporate, individuals, banking. 

"And now we become the beneficiary of all these liquidity into this part of the world. And most prominent is the rise in asset prices in this part of the world, and it has become levels in which prices are socially unacceptable, policy makers have to respond. 

"So far, based on some of the measures that we have seen, whether in Singapore, Hong Kong or China, the first effect is that the volume transacted just dries up significantly. The question next is whether the prices will come down or not. 

"I think one of the important factors is that borrowing cost is so cheap. But a lot of friends a lot of investors I talk to, after they sell their property, asked me 'where should I put my money next?'. I say slowly, slowly, because the interest rate environment is so low here, you just want to force and lock into assets and that cause prices to increase." 

But with a low base, the only way is up for interest rates. Interest rates are expected to rise marginally in the year ahead, and experts said this would bring up the cost of borrowing to a more normal level. 

Mr Koh said: "We have always been calling that by the end of the year, interest rates will be higher, purely because interest rates are so low they can only go up. But every year, it's not correct because it takes so long for the US to get out of its situation. 

"If you look at the Singapore context, our main monetary policy is currency, ours is interest rate tied to US interest rates. At the end of the day, it depends whether the Fed is going to hike its interest rates. 

"If you look at the situation that they have right now, it's a banking crisis - it will take time to resolve, in fact it will take 3 to 5 years. What that means is that global interest rates will remain low, Singapore interest rates will remain low. By the end of the year, maybe 30 basis points higher than what we are seeing at current levels - rates will rise but only marginally. 

"In terms of the man in the streets, I think one of the concerns about policy makers this time round is that, at this point in time when we are looking at all the various indicators, Singapore property is certainly not in the bubble yet, certain segments perhaps. 

"But one of the things that could change the equation materially is the interest rate environment. Interest rates right now, SIBOR rate is about 0.3-0.4 per cent. The only way you can go is up. How would that affect the man on the street with a big property under his hands? I think that would be some of the concerns." 

And with inflationary costs pressures and borrowing on the rise, experts said more trades in the region may be settled in renminbi. That is because the currency is still considered undervalued. 

Suan Teck Kin, an economist at UOB, said: "I think in terms of regional trade with China, because of recognition of this undervaluation, I would see that the tendency to hold renminbi and to ... settle trade in terms of renminbi would increase because you know that like what I mentioned earlier."  

Going forward, however, economists maintain that concerns over the recovery in the US and Eurozone Sovereign risk will continue to weigh on the growth of Asian economies.

channelnewsasia.com