Some Asia economies may need rapid rate hikes to cool inflation

Several Asian central banks must raise interest rates rapidly, because inflationary pressures are rising due to a global surge in food and fuel costs caused by the war in Ukraine, said a senior International Monetary Fund (IMF) official.

“Asia’s growing inflation pressures remain more moderate compared with other regions, but price increases in many countries have been moving above central bank targets,” Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, wrote in a blog published on Thursday.

“Several economies will need to raise rates rapidly as inflation is broadening to core prices, which exclude the more volatile food and energy categories, to prevent an upward spiral of inflation expectations and wages that would later require larger hikes to address if left unchecked,” he said.

Most emerging Asian economies had experienced capital outflows comparable to those in 2013, when global bond yields spiked on hints by the US Federal Reserve that it might taper bond buying sooner than expected, Srinivasan said.

Outflows had been especially large for India, which had seen $23 billion move out since Russia’s invasion of Ukraine, he wrote. Outflows had also been seen in such economies as South Korea and Taiwan.

Tightening monetary conditions would strain already worsening finances in some Asian economies, and limit the scope for policymakers to cushion the economic blow from the pandemic with fiscal spending.

Asia’s share of total global debt had increased from 25 per cent before the global financial crisis to 38 per cent post-Covid, raising the region’s susceptibility to changes in global financial conditions, Srinivasan said.

Some Asian countries might need to tap measures such as foreign exchange interventions and capital controls to combat any sharp outflow of funds, he added.

Meanwhile, Sri Lanka has resumed technical discussions with the International Monetary Fund on a potential bailout after a new government took office, the finance ministry said on Friday.

Discussions with the multilateral lender started in April under former President Gotabaya Rajapaksa. The Sri Lankan government hopes to secure an Extended Fund Facility (EFF) - which would be conditional on making economic reforms - to help battle the worst economic crisis since independence in 1948.

The talks with IMF were highly successful and Sri Lanka is working with advisers to reach consensus on a deal with creditors, the government said.

The South Asian nation of 22 million has $12 billion overseas debt with private creditors. It defaulted on a bond payment earlier this year and is struggling to pay for imports of basic goods.