IMF sees “more pressing” need for tightening in Asia

Reuters  - Many Asian economies have been slow to raise interest rates and clamp down on credit and they need to act promptly to avoid overheating, the International Monetary Fund said last week.

Higher currency exchange rates should be a key line of defense against rising inflation, the fund said in its periodic Asia economic outlook.

“The tightening cycle has generally been slow, possibly reflecting lingering doubts about the strength of the global recovery and of private domestic demand in Asia,” the IMF said.

“The need to tighten macroeconomic policy stances in Asia has become more pressing now than it was six months ago.”

As of March 2011, policy rates were below levels that IMF staff had predicted in India, Indonesia, Korea and Thailand. In China, Korea and India, real policy rates were negative when adjusted for inflation.

The IMF has recently stepped up its warnings about rising inflation in Asia, listing that among the threats to global economic stability. It expects inflation to increase further in 2011 before decelerating modestly in 2012.

The fund said it was premature to say China was overheating and its inflation rate appeared close to peaking, but “credit dynamics” there were particularly strong and the property markets looked “buoyant.”

It acknowledged that tighter monetary policy can have the unintended consequence of attracting more foreign investment which worsens inflation, but advised against relying on capital controls as a substitute.

“Policy responses to capital inflows so far have been appropriately narrowly targeted,” the IMF said.

The Fund is in the middle of an internal debate over what advice it should offer countries on the use of capital controls. Although the IMF has softened its opposition to controls, some officials worry that countries will take that as a license to impose too many restrictions.

“The first line of defense is macroeconomic policies, including both monetary and exchange rate policy, and fiscal policy,” the IMF said.