The central government may implement three more rate cuts by the second quarter of next year to stimulate the country's economy, the UK-based investment bank Barclays Capital said on Friday.

The bank says the nation's working capital rate may be reduced to 5.04 percent from 5.58 percent by the end of 2008, and may be further trimmed to 4.5 percent and 4.23 percent in the first and second quarter of 2009, respectively.

It also predicts that the base rate in Hong Kong may be cut from the current 1.5 percent to 1 percent and 0.75 percent consecutively by the fourth quarter of 2008 and the first quarter of 2009.

With inflationary pressures receding and growth concerns rising, central banks across Asia are front-loading and easing monetary conditions through a combination of lower policy rates, weaker currencies and quantitative easing, said Peter Redward, director and head of emerging Asia research.

"The central government may prefer a rate cut to stimulate the economy, yet it may consider weakening the yuan if the economic measures do not succeed," Redward said.

Barclays Capital expects Asian currencies to remain weak in the next two quarters, as the US dollar may stay relatively strong in the first half of 2009.

"The exchange rate between the yuan and the US dollar will be stabilized in 2009, while the yuan may trade at 6.81 against the dollar in the next 12 months," Redward added.

As external demand weakened and credit conditions tightened aggressively, the bank predicts the GDP growth of the Asian emerging market to slow down to 7.2 percent in 2008 and further slide to 5.2 percent in 2009. However, the easier monetary conditions, lower commodity prices, especially in energy, and fiscal stimulus may help boost the economy in 2009.

Commenting on China's GDP growth, Barclays Capital forecasts it may drop to around 7.8 percent in 2009, while it may also experience a short-term deflation in the first half of 2009.

"Falling food and energy prices, declining core CPI inflation and favorable base-year effects could bring deflation in China, Malaysia and Singapore by mid-2009," Redward said. The GDP in Hong Kong SAR may tumble to minus 2 percent in 2009.

As Asia equity index has declined by 64 percent from its peak in Oct 2004, Barclays Capital expects the economic weakness and disappointing earnings report to keep the Asian market subdued in the first quarter of 2009.

"Yet we believe the equities are in the process of finding a floor, especially in regions where valuations are heavily discounted and domestic liquidity conditions are likely to strengthen, such as the mainland, Hong Kong, Taiwan, South Korea and Singapore," Redward said.

(HK Edition 12/13/2008 page2)