Federal Reserve is likely to lift borrowing costs as it takes a 'measured' response While some regional markets reacted negatively yesterday on concerns Asian interest rates would follow their United States counterparts which might be lifted earlier than expected, fund managers remained bullish on the region, saying the rate-rise effect would be short-lived and unlikely to derail the economic growth in Asia. On Tuesday, the US Federal Reserve kept the Fed Funds rate unchanged at 1 per cent but discarded the reference to 'patience' and instead said: 'The [Federal Open Market] Committee believes that policy accommodation can be removed at a pace that is likely to be measured, with inflation low and resource use slack.' This led analysts and investors to believe the Fed would raise rates either next month or August. Most are predicting a rise next month. Citigroup said in a report the FOMC appeared to be signalling an initial move fairly soon - probably next month or August. 'We had not thought that the first rise would be taken this early, but the first move has always been a close call and not the most critical to the overall outlook for rates ... we lean a little toward a June rise and a long spell of waiting thereafter,' the brokerage said. Barclays Capital said in a note it believed the Fed tightening might be brought forward to the June 30 FOMC meeting, as compared to the August 10 meeting currently priced in by the Fed Funds futures, unless economic data over the next few months suggests a slowdown. First State Investments head of Asian fixed income Ben Yuen believed the Fed would raise rate but emphasised the policymaker had not fixed a timetable and the extent of the raise. 'The policymakers will be closely monitoring the employment data in the coming two to three months,' Mr Yuen said. Despite an imminent rate rise, he remained upbeat on Asian US dollar bonds, saying the rise would have limited impact on the asset class. The price of an Asian bond issued in US dollars depends on prevailing benchmark US treasury rates and the 'spread' or risk premium based on the creditworthi- ness of the issuers. 'Historically in a rising-rate environment, the non-US treasury effect would raise and offset the yield loss from the US treasury portion,' Mr Yuen said. In addition, improving fundamentals in the regional economy and credit profile of the Asian issuers would give more room for Asian bonds to tighten. He has overweight positions in Hong Kong, Malaysia, Thailand and Indonesia but is underweight China and Singapore. First State Investments Greater China equities director Martin Lau said the rate rise, despite a short-term volatility on the consumption and property sectors, would have little impact on Asian equities. A rate rise would mean a higher cost for consumers and homebuyers or property investors to spend or buy properties. The lower loan-to-deposit ratio but higher saving ratio in Asia would mean higher affordability for Asians to spend and buy properties, Mr Lau said. He was optimistic on the consumption sectors in light of the younger demographics in Asia and the rising consumption power in China. 'The mainland [overheating] economy will slow down, but a hard-landing scenario is unlikely and domestic consumption strength should remain,' he said.