Higher Inflation Requires ‘More’ Monetary Policy Tightening in Asia, IMF Says

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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.

“While our baseline is for inflation to have peaked by end-year, large exchange rate depreciations could lead to higher inflation and greater persistence, particularly if global interest rates rise more forcefully and, thus, require more monetary policy tightening in Asia,” he told a press conference.

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.

“Asia is now the largest debtor in the world besides being the biggest saver, and several countries are at high risk of debt distress,” he said.

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.

Asian Development Bank’s report (pdf) estimates the rest of developing Asia will grow by 5.3 percent this year and 2023, excluding China. This will be the first time in over three decades that the rest of developing Asia will grow faster than China.

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.

“These recent depreciations have started passing through to core inflation across the region, and this may keep inflation high for longer than previously expected,” Srinivasan and Shanaka Pieris wrote in an IMF blog post on Thursday. Pieris is a division chief in the IMF’s Asia and Pacific Department.