The International Monetary Fund has stated that most Asian central banks must tighten monetary policy further. This is because rising commodity prices and their currencies’ depreciation, driven by steady U.S. interest rate hikes, contribute to inflation exceeding their targets. China and Japan are exceptions, where the economic recovery has been weaker, slack remains substantial and inflation has not risen as sharply as elsewhere. This is according to Krishna Srinivasan, director of the IMF’s Asia and Pacific Department.
As U.S. monetary tightening led to wider interest rate differentials, many Asian currencies depreciated “quite sharply,” thereby increasing import costs, he indicated. “Inflation is expected to peak by year’s end, but large exchange-rate depreciations may result in higher inflation and greater persistence, particularly if global interest rates rise more forcefully.” Srinivasan spoke during the IMF and World Bank annual meetings in Washington.
Rising interest rates and large currency depreciations could also strain Asian debt-ridden countries, Srinivasan said. “Several countries in Asia are at high risk of debt distress, and Asia is now the world’s largest debtor,” he noted. China takes the brunt of Asia’s debt growth, but other economies are also affected, explained Sanjaya Panth, deputy director of the IMF’s Asia and Pacific Department. “Market stress cannot be ruled out. However, many economies’ low external debt levels, higher reserves and resilient financial systems give us comfort,” he said.