TOKYO: Asian central banks may see scope to loosen monetary policy later this year as inflation moderates, the International Monetary Fund said on Wednesday and called on China to give a clear message in how it plans to address its property woes.
Average inflation in Asia fell to 2.6% in 2023 from 3.8% in 2022, with particularly swift progress in emerging economies, Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, told a news conference.
With inflationary pressures “receding rapidly,” prospects for a soft landing were improving in Asia, he said.
“Many regional central banks are on course to reach their inflation targets in 2024.
Provided policymakers hold steady until inflation is firmly re-anchored, scope for monetary easing may emerge later in the year,“ he said in the briefing on the IMF’s updated regional economic outlook.
However, Srinivasan warned of divergence among countries, with China’s near-zero price growth last year “fueling concerns about deflation,” while Japan’s inflation will likely remain above the central bank’s 2% target until 2025.
Relatively benign inflation meant Asian central banks raised interest rates less than their counterparts in other regions, putting downward pressures on some Asian currencies in the fall of 2023, he said.
“These pressures have abated for now, as the (US) Federal Reserve has signaled interest rate cuts going forward.
IMF revises up Asia’s growth forecast, warns of China risk
However, there is a risk that divergent monetary stances in the United States and in Asia would trigger sharp exchange rate movements also this year,“ he said.
“If so, central banks should avoid being distracted by temporary turbulence and focus firmly on price stability.”
Srinivasan said the IMF now expects Asia to expand 4.5% this year, up from 4.2% projected in October, due to robust US demand and the boost from expected stimulus measures in China.
“Overall, Asia is on track to deliver again two-thirds to global growth in 2024, as it did in 2023,” he said.
The region’s growth is likely to slow to 4.3% in 2025 due largely to an expected slowdown in China’s economy, he added.
On China, Srinivasan urged authorities to give “a consistent, clear set of messages” to address its property sector woes that focuses on the need to separate viable developers from unviable ones.
He also said China’s decision last week to make a deep cut to bank reserves was in line with the IMF’s proposal to ramp up monetary support to underpin the economy.
“But I think going forward, we would prefer if there were more policy rate cuts than cuts to the required reserve ratio,” as it would more directly boost demand, Srinivasan said.
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