"Asian central banks are unlikely to stop their intervention activities anytime soon," said Standard and Poor's credit analyst Kim Eng Tan.

"Far from being helpless victims of circumstances, governments of affected economies are the only parties capable of providing relief to the situation in the medium term. Governments can help their economies maintain macroeconomic stability without causing a sharp slow-down in economic growth by allowing their exchange rates to float more freely and by implementing policies engendering productivity gains that will counter a loss of competitiveness from an appreciating exchange rate."

In Thailand, it is feared that market intervention will have a negative impact on economic growth, despite the Bank of Thailand's insistence that its 30-per-cent reserve requirement will boost gross domestic product (GDP) 0.79 per cent.

Last week, the central bank revised downwards its GDP growth forecast by 0.5 per cent, to 4-5 per cent, reflecting dull spending and delayed private investment.

The Finance Ministry says it will review its economic growth forecasts next month. At present, it is similarly predicting growth of 4-5 per cent.

Tan's comments yesterday followed the release of the Standard and Poor's report "Growing Foreign Reserves Are Squeezing Out Monetary Options". It shows that strong investment flowing into East Asia since the middle of 2003 has in many cases reinforced current-account surpluses and put upward pressures on regional exchange rates. In an effort to maintain export competitiveness, a number of central banks have intervened in the foreign-exchange market to stem the nominal appreciation of their currencies.

In affected economies, this has complicated monetary policy-making and constrained monetary flexibility, which is a key area of concern in fixing sovereign ratings, says the report.

Over the medium term, the firm said governments could ease constraints on monetary flexibility by introducing greater domestic competition in the non-tradable sector, liberalising business regulations and promoting deeper domestic capital markets.

"Seeking to prevent a slippage of their export competitiveness, many central banks have resisted the appreciation of their currencies by purchasing main international currencies with their local currencies," Tan said.

In their efforts to hold down the value of their currencies, Asian central banks have amassed a substantial amount of foreign reserves. While usually viewed as a positive for sovereign creditworthiness, large gains in foreign reserves also have the potential to complicate monetary-policy implementation. This is because central banks often finance their foreign-currency purchases with domestic liabilities on which market interest rates are paid.

Only when domestic interest rates are lower than those on a central bank's international reserves will the central bank have a positive cost of carry on its foreign-reserve holdings. Even then, the central bank will remain exposed to marked-to-market losses on its holdings of international reserves if it eventually decides to let its currency appreciate in nominal terms.

For these reasons, foreign-exchange intervention by some Asian central banks has constrained monetary flexibility. Domestic economic conditions - particularly when inflation is rising or higher than that of a country's trading partners - argue for maintaining domestic interest rates above those of the G-3 countries: Colombia, Mexico and Venezuela.

At these levels, however, central banks experience a negative cost of carry on their international reserve holdings. This appears to be the case in Indonesia, South Korea, Thailand and Vietnam. All have experienced strong investment inflows, particularly last year. Conditions in these economies have also kept domestic interest rates close to those in the G-3 grouping.