TOKYO- Expected interest rate hikes by the US Federal Reserve may delay emerging Asia’s economic recovery and keep pressure on policymakers to guard against the risk of capital outflows, a senior International Monetary Fund official said.
Rising inflationary pressure, China’s economic slowdown and the spread of coronavirus cases from the Omicron variant also cloud the region’s outlook, said Changyong Rhee, director of the IMF’s Asia and Pacific Department.
“We are not expecting a US monetary normalization to cause big shocks or large capital outflows in Asia, but emerging Asia’s recovery may be retarded by the higher global interest rates and leverages,” he told Reuters in a written interview.
As worries over a more hawkish Fed roils global markets, investors expect the US central bank to signal on Wednesday its plan to raise rates in March. Markets have priced in a total of four rate increases this year.
Rhee said there was a risk US inflation could turn out higher than expected, and require a “faster or greater” monetary tightening by the Fed.
“Any miscommunication or misunderstanding of such changes may provoke a flight to safety, raising borrowing costs and resulting in capital outflows from emerging Asia,” he said.
In an updated World Economic Outlook released on Tuesday, the IMF slashed emerging Asia’s growth projection for 2022 to 5.9 percent from its October forecast of a 6.3 percent expansion. The downgrade was largely due to a hefty 0.8 percent point cut in China’s 2022 growth estimate to 4.8 percent, which reflected the impact of property sector woes and the hit to consumption from strict COVID-19 curbs.
“China is still the factory of the world. Weakening of China’s domestic demand will also reduce neighboring countries’ external demand in general,” Rhee said. – Reuters
