The International Monetary Fund (IMF) said Thursday that Asia’s central banks must tighten monetary policy further to ensure that inflation returns to target levels as currencies across the region weaken.
Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, said that a tighter monetary policy is needed for most of the region, except for China and Japan, where the recovery has been weaker and slack remains substantial.
Srinivasan said that core inflation had exceeded central bank targets in most Asian economies, and many Asian currencies have depreciated “quite sharply” as U.S. monetary tightening led to widening interest rate differentials.
Srinivasan warned that large depreciations and rising interest rates could trigger financial stress in countries with high debt. Fiscal consolidation is needed to moderate demand alongside monetary policy and stabilize the debt, he added.
China’s Economic Slowdown Implicates Asia
Srinivasan said that China’s economic slowdown—which is mainly caused by its stringent lockdowns—could have a “significant” spillover effect on the region, particularly on countries economically linked to China.“All countries, either they import or export to China. In that sense, if China slows, it’s going to have a significant impact on the region. And that’s why it’s important for China to address these headwinds,” he said.
The IMF has lowered its growth projections for Asia and the Pacific to 4 percent this year and 4.3 percent for next year, which are well below the 5.5 percent average growth over the last two decades.
Most Asian emerging market currencies have lost between 5 percent and 10 percent of their value against the dollar this year, whilst the Japanese yen has depreciated by more than 20 percent, according to the IMF.