IMF tells Asian central banks not to follow Fed too closely

The International Monetary Fund urged Asian central banks to focus on domestic inflation and avoid tying their policy decisions too closely to anticipated moves by the U.S. Federal Reserve.

Receding expectations for a near-term interest cut by the Fed have fed steady dollar gains that have pushed down some Asian currencies such as the Japanese yen and the South Korean won.

The IMF’s staff analysis showed that U.S. interest rates have a “strong and immediate” impact on Asian financial conditions and exchange rates, Krishna Srinivasan, director of the lender’s Asia and Pacific department, said on Thursday.

“Expectations about Fed easing have fluctuated in recent months, driven by factors that are unrelated to Asian price stability needs,” he said in a briefing on the region’s outlook.

“We recommend Asian central banks to focus on domestic inflation, and avoid making their policy decisions overly dependent on anticipated moves by the Federal Reserve,” he said. “If central banks follow the Fed too closely, they could undermine price stability in their own countries.”

The remarks underscore the dilemma some Asian central banks face as the recent Fed-driven currency market swings complicate their policy path.

Bank of Korea Governor Rhee Chang-yong told a separate IMF seminar on Wednesday that fading Fed rate-cut chances have caused headwinds for the won, and complicated his bank’s decision on when to start cutting borrowing costs.

In its World Economic Outlook, the IMF expects Asia’s economy to expand 4.5% this year, down from 5.0% last year but an upward revision of 0.3 percentage points compared to October.

It expects the region to grow by 4.3% in 2025.

The outlook for China’s economy was critical for Asia with a more protracted slowdown in the world’s second-largest economy among key risks to the region’s growth outlook, Srinivasan said.

While an increase in government spending could benefit China’s economy, policies that boost its supply capacity would “reinforce deflationary pressures and could provoke frictions,” he said.

Also among risks to Asia were trade curbs adopted at a rapid pace, he said.

“Few regions have benefited as much from trade integration as Asia,” Srinivasan added. “Hence, geoeconomic fragmentation continues to be a large risk.” International Monetary Fund Managing Director Kristalina Georgieva bemoaned the slow pace of global growth on Thursday, saying that Europe needed to do more to boost productivity and China should work to unleash greater consumer spending.

Georgieva told a news conference during the IMF and World Bank spring meetings in Washington that a number of factors are converging to hold back growth in Europe and China, from aging populations to sub-optimal allocations of capital, while the U.S. has far outperformed expectations.

“This is what preoccupies us these days. How can we better stem the slowdown of productivity and growth, and what we can do to reverse it?” Georgieva said.

The IMF on Tuesday forecast global growth at 3.2% for 2024 - well below its 20-year pre-pandemic average of 3.8% - citing lackluster performances in Europe and China and the impact of high interest rates and regional wars on developing economies. And asset managers are bracing for delays in rate cuts as the U.S. Federal Reserve struggles with persistently high inflation.

The IMF boosted its U.S. growth forecast by 0.6 percentage point to an above-potential 2.7% for 2024, while cutting the forecast for the euro zone by 0.1 percentage point to 0.8%.

Georgieva said the U.S. has done a better job of harnessing technology innovation and turning it into scalable business activity. The U.S. also has benefited from domestic energy production that has kept energy prices low and immigration that has created an ample supply of labor without too much wage inflation.

Technology has not brought similar gains to Europe, she said.

“We know that in Europe, there is still work to be done to unleash the power of innovation. Just comparing the cost of a patent in the U.S. and the European Union tells you a story,” Georgieva said, referring to higher EU costs and regulations.

More also can be done to raise investments in human capital to create more dynamic labor markets and better allocation of capital, she said.

Georgieva said China, where domestic demand is suffering because of a property crisis brought on by over-investment, was at a “fork in the road” and should pivot away from its decades-old investment- and export-led growth model to one led by consumer spending.

“The time has come to look at domestic sources for growth,” she said of China.

Agencies