BIS warns of asset bubbles, inflation in emerging nations

The world's emerging economies may need to raise interest rates and allow currency appreciation because their ''accommodative'' monetary policies threaten to spur inflation and asset bubbles, the Bank for International Settlements said on Monday.

Developing countries have kept rates low to help boost economic growth, even as inflation accelerates in Asia, parts of Latin America and Turkey, BIS said in its annual report today.

Capital inflows from investors seeking assets in countries with higher growth rates than debt-laden advanced economies have led many developing nations to intervene to prevent currency appreciation and protect exports, the Basel, Switzerland-based bank wrote. Investor inflows may stimulate economic growth in the medium term, yet ''can be destabilising,'' the report said.

''Keeping interest rates too low for too long increases the risks of domestic overheating, inflation, excessive credit expansion and asset-price overshooting,'' BIS said. ''There may be no effective alternative to raising interest rates, allowing greater flexibility in exchange rates and reducing reliance on foreign-exchange intervention.''

Malaysia, the Philippines and Singapore have used forward positions and China built up foreign reserves through the global credit crisis to help control the exchange rate, the report said.

Central bank policy makers in Brazil and India have begun raising rates. Brazil's central bank increased the benchmark interest rate on 9 June for a second consecutive meeting, to 10.25 per cent from 9.5 per cent, in a bid to bring inflation back to target amid forecasts the economy will expand this year at the fastest pace in decades. India has increased rates twice since mid-March and may raise them again, according to current indications.