Policy makers in the Asia-Pacific region have scope to further ease monetary policy to bolster growth in the event the global economy sputters, the International Monetary Fund said.
“Inflation expectations have remained well anchored in most of Asia,” the IMF said in a regional economic report today. “Should activity fail to pick up as projected, further easing may be warranted” in countries including South Korea and Malaysia, while elevated consumer-price growth in India and Vietnam “may limit the room for policy maneuver” in those economies, it said. Japan may need more easing to accelerate achievement of its 1 percent inflation goal, the fund said.
The scope to adjust interest rates varies across the region, with Japan’s benchmark near zero and Australia’s at 3.25 percent, the highest among major developed nations. Singapore’s central bank unexpectedly announced today it will leave monetary policy unchanged to curb consumer price gains, while South Korea yesterday lowered its key rate to 2.75 percent.
Asian nations should remain the world’s growth engine, said the Washington-based lender, which is holding its annual meeting in Tokyo this week. A sudden slowdown in China’s economy is unlikely, even as “considerable” threats to the region linger as Europe struggles to emerge from a crisis that’s restraining world growth, the IMF said.
“While relatively strong economic and policy fundamentals have helped buffer Asian economies against adverse market spillovers, aggressive deleveraging by euro-area banks and flight of capital to traditional safe havens could also severely disrupt Asian financial systems,” it said.
Asia’s growth is likely to slow to 5.4 percent this year, about half a percentage point below the April forecast, from 5.8 percent last year, the IMF said in today’s Asia and Pacific Regional Economic Outlook. Even so, the region will stay “the global growth leader,” expanding more than 2 percentage points faster than the world average, it said.
The fund cautioned that the Asia-Pacific region’s growth in the next two or three years can’t be taken for granted as the scale of recent slowdowns in large economies “raised concerns that it might not be just cyclical.”
China’s economy may expand this year at the slowest rate since 1999, according to the median forecast of 45 economists in a Bloomberg survey.
“Many Asian economies have now reached a development stage that exposes them to the risk of falling into the ‘middle-income trap,’ which is the phenomenon of hitherto rapidly growing economies stagnating at middle-income levels and failing to graduate into the ranks of high-income countries,” the IMF said.
IMF projections show a one-in-seven chance Asia’s growth will slow to below 4 percent in 2013, close to the rate in 2009, the fund said.
Two cuts by China’s central bank to key interest rates this year, three reductions in the reserve requirements for banks since November and accelerated approvals for investment projects haven’t been enough to reverse a deceleration in growth.
While a hard-landing for China “remains a low probability,” it’s a “high-impact risk” for the region, the IMF said. Each 1 percentage point decline in investment growth in China would lower economic growth by more than half a percentage point over four quarters in economies including South Korea, Malaysia and Taiwan, it said.