The IMF said Asian central banks generally have room to lower interest rates to support domestic demand and offset the impact of the escalating global trade war, with the region in much stronger shape than before the Asian financial crisis.
Inflation in the region is at par or even below central banks’ target ranges, which should allow more monetary easing, IMF Asia and Pacific Department director Krishna Srinivasan said yesterday.
While that could weaken currencies, especially if rates in the US stay higher for longer, “what we are advising countries is to let the exchange rate be the shock absorber, and let monetary policy provide you space you need to adjust” to the tariff shock, he said.
Photo: EPA-EFE
The recommendation comes as US President Donald Trump’s tariffs threaten to slow the global economy, with the export-driven Asian region set to be among the hardest hit. The IMF expects Asia’s economy to grow just 3.9 percent this year and 4 percent next year, as it deals with a “double whammy” from weaker external demand and higher US tariffs, Srinivasan said.
That represents a cumulative downgrade of 0.8 percentage points from the IMF’s earlier forecasts, its sharpest adjustment since the COVID-19 pandemic, he said, adding that the new forecasts face “significant downside risks,” depending on the outcome of trade negotiations with the US.
On the plus side, the region’s fundamentals are “much, much better” than during the 1997 to 1998 Asian financial crisis, when the IMF bailed out Indonesia, South Korea and Thailand, Srinivasan said.
Differences include credible policy frameworks, independent central banks and less currency mismatch in their balance sheets, he added.
The IMF urged Asia to look toward its domestic economy to drive growth, and undertake the necessary structural reforms to stimulate consumption and investment that remain soft compared with pre-COVID-19 levels.
Lower borrowing costs should help bolster demand and lift countries out of deflationary territory, such as China and Thailand. Any fiscal support should be “targeted and time-bound” since budget deficits remain high post-COVID-19, Srinivasan said.
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