ICEC

IMF: Asia Must Shift Gears And Tighten Policy

Asian nations should prepare to “shift gears” and tighten monetary policy as their economies strengthen and inflationary pressures rise, the International Monetary Fund said.

Inflation has been “creeping upward” in Indonesia, South Korea and Singapore and most economies in the region have seen price expectations rise since the end of 2011, the Washington-based lender said in a report yesterday. Domestic demand has remained strong, and economic expansion is projected to gain momentum, it said.

“Asian policymakers face the difficult task of calibrating the amount of insurance needed to support stable, non-inflationary growth,” the IMF said.

“But with acute financial tensions in key global financial markets easing in early 2012, and signs that the slowdown is bottoming out in most of Asia, policy makers in the region should also stand ready to normalise macroeconomic policies at a faster pace than expected earlier this year.”

Japan added monetary stimulus for a second time in three months yesterday, even as many Asian central banks kept interest rates steady in recent weeks as they juggle the need to damp inflationary pressures and bolster growth, with Europe’s debt crisis and a slowdown in China’s expansion weighing on the global economic outlook.

Policymakers should remain vigilant and those with scope to ease may need to do so if there are signs of “renewed deterioration in external conditions,” the IMF said.

Standard & Poor’s cut Spain’s credit rating yesterday for the second time this year. “The global economy remains fragile, exposing Asia to serious downside risks,” the lender said. “The debt crisis in the euro area has not been fully resolved, and financial turmoil could still escalate in the region and spread globally, while increased geopolitical risks could push energy prices sharply higher.”

Growth outlook

Asia may expand 6 per cent this year, and growth may accelerate to 6.5 per cent in 2013, the fund said in its Regional Economic Outlook report. The economies grew 5.9 per cent in 2011. Central banks in the Philippines, Indonesia and South Korea held borrowing costs unchanged this month, India lowered rates by more than economists forecast and Australia signalled slower inflation would increase prospects for its first reduction this year.

Singapore was an outlier, as a rebound in its economy and accelerating inflation prompted the central bank to unexpectedly tighten monetary policy by allowing faster currency gains.

 In India, fiscal consolidation is the key to containing inflationary pressures, the IMF said. The nation needs to revive its “flagging structural reform agenda”, including steps to bolster investment, education and infrastructure, the lender said.

Reducing trade barriers can boost job opportunities, it said.

 Asset-purchase fund

The Bank of Japan expanded its asset-purchase fund, the main policy tool, to 40 trillion yen (Dh1.8 trillion) from 30 trillion yen amid mounting calls from lawmakers to redouble efforts to spur economic growth. It also extended the maturity of bonds it buys to three years from a two-year limit.

“Policymakers should be ready to shift gears and renew their tightening cycle as overheating pressures become evident,” the IMF said. “Economies with greater exposure to downside risks and those closer to neutral monetary policy stances could afford to pause longer, but others with more accommodative conditions, stickier core inflation, and more buoyant credit growth may need a faster return to more neutral policy stances.”

While a “hard landing” in China is a risk for Asia, a “sharp correction” in the property market is a low probability, the IMF said yesterday. China’s economy expanded 8.1 per cent last quarter.

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