“Domestic policy responses, both monetary and fiscal, appear to have played a significant role in shoring up domestic demand in an environment in which exports were performing disastrously,” Gokarn said. “This positive story could be derailed, however, by potential threats such as a surge in inflation and higher interest rates, which would hinder private-sector activity, and persistent global sluggishness.”

Central banks around the region have lowered interest rates to complement the billions of dollars that governments are pumping into their economies to kick-start local consumer and business spending. As the global recession shows signs of having past the worst, officials are deliberating the right time to exit such policies without derailing the recovery.

Oil and commodity prices have shown tendencies to surge beyond levels warranted by demand-supply conditions, the credit ratings company said in its report.

“While prices have moderated in recent weeks, the threat of a surge similar to the one seen in first-half 2008 remains,” it said. “If this were to happen, central banks would feel pressured to move to a tightening monetary stance sooner than would be warranted by fundamental factors. This could forestall a recovery.”

‘Very accomodative’

The Reserve Bank of Australia’s decision on when to raise borrowing costs from a half-century low will need to balance the risk of stoking inflation with prematurely killing off confidence and demand, the central bank said in minutes of its August 4 meeting released this week.

The first risk involves “overstaying a very accommodative setting in a recovering economy,” the central bank said. “On the other hand, there was a risk of an early tightening choking off confidence and demand prematurely.”

In South Korea, some economists say the central bank may need to raise rates as early as November to prevent inflation from accelerating following its economic recovery. The Bank of Korea on August 11 kept its benchmark rate unchanged at a record low for a sixth consecutive month.

In Philippines, the central bank kept its benchmark interest rate unchanged, ending its longest series of cuts since at least 2002 as the government said the economy is recovering from the global recession.

Bangko Sentral ng Pilipinas held the rate it pays lenders for overnight deposits at a record low of 4 percent, it said in a statement in Manila Thursday.

Source: Bloomberg