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PP 7767/09/2010(025354)

Economic Highlights
Global
•MARKET DATELINE

7 April 2010

1 The US Fed Saw Recovery Dragged By High


Unemployment

2 Australia Raised Key Interest Rate To 4.25%

3 Indonesia Kept Its Key Policy Rate Unchanged

4 China’s Services Activities Rebounded In March

Tracking The World Economy...

Today’s Highlight

The US Fed Saw Recovery Dragged By High Unemployment

The US Federal Reserve officials see signs of a strengthening recovery that could be dragged by high unemployment and
tight credit, indicating that a hike in its key policy rate is still a distance away. “While recent data pointed to a noticeable
pick-up in the pace of consumer spending in the 1Q, policymakers agreed that household spending going forward is likely
to remain constrained by weak labour market conditions, lower housing wealth, tight credit, and modest income growth,”
minutes of the 16 March Federal Open Market Committee showed. However, the Fed will likely continue to exit its
emergency lending programmes, albeit at a measured pace, after it had ended its quantitative easing policy fully at end-
March. Indeed, the Fed is considering a variety of tools to tighten policy, from raising interest rates on banks’ reserves
kept at the Fed to selling assets, reverse repos and the issuing of term deposits, to prevent a surge in inflation once
the recovery takes hold.

At the same time, policymakers were surprised by the rate at which inflation was slowing and the moderation in price
changes was widespread across many categories of spending. As it stands, the core personal consumption expenditures
(PCE) price index, a price gauge favoured by the Fed, eased to 1.3% yoy in February, from +1.5% in January and a
recent high of +1.6% in December. Indeed, the core consumer price for the Organisation for Economic Cooperation and
Development countries, which grew at a record low of 1.5% yoy in February, has raised concerns over the building up
of disinflationary pressure, as deflation can be debilitating for an economy and is much more difficult to deal with.

Australia Raised Key Interest Rate To 4.25%

The Reserve Bank of Australia raised its benchmark interest rate for the fifth time to 4.25% and signalled further
increases, dismissing warnings that higher borrowing costs are already eroding consumer spending. The increase
reflected the Reserve Bank of Australia’s concern over rising property prices and inflationary pressure. Indeed, the
Governor said last week that “Australian house prices are getting too high and interest rates to most borrowers have
been somewhat lower than average,” signalling that he wants to minimise the danger of a housing boom and bust in the
aftermath of the US example. Meanwhile, inflation in Australia accelerated to 2.1% yoy in the 4Q, from +1.3% in the
3Q. This was still within the central bank’s target range of between 2-3%.

Peck Boon Soon


(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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7 April 2010

Asian Economies

Indonesia Kept Its Key Policy Rate Unchanged

◆ Indonesia’s central bank kept its key policy interest rate unchanged at 6.5% for an eighth consecutive
month on 6 April, judging that inflation is not yet enough a threat. Bank Indonesia does not see an urgent need
to raise interest rates, as inflation was still within the target of 4-6% and it does not foresee inflationary pressure
to build up significantly in 1H 2010. In fact, Indonesia’s inflation rate moderated to 3.4% yoy in March, the slowest
in three months and compared with +3.8% in February. In addition, Indonesia’s commercial lenders have just been
asked to cut loan rates by between 1-2 percentage points in February and the central bank will probably not want
to contradict with this instruction at this stage. Following which, the average banks’ lending rate fell to 15.2% on
5 April from 16.1% in early March.

China’s Services Activities Rebounded In March

◆ China’s Purchasing Managers Index (PMI) for the services sector rebounded to 58.1 in March, from
46.4 in February. This suggests that services activities expanded at a faster pace, as the previous month’s
activities were affected by shorter working days due to the Chinese New Year celebration break. The pick-up was
on account of higher output and new orders, in line with stronger trade activities and consumer spending. The pick-
up in services activities, together with stronger manufacturing sector growth, suggests that economic activities
in China will likely sustain its expansion in 1Q 2010, after accelerating to 10.7% yoy in the 4Q.

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