SINGAPORE- Relatively lower inflation in Asia means the region’s central banks can focus more on domestic conditions and less on what the US Federal Reserve might do when setting monetary policy, the International Monetary Fund said on Tuesday.
The region is heading for a “soft landing” thanks to rapid disinflation creating room for easing monetary policies, the lender said in a report, although the pace of economic expansion is expected to slow over the next two years.
“Don’t tie yourself too tight to what the Fed does, look at what’s happening to inflation (domestically),” IMF Asia-Pacific Director Krishna Srinivasan told reporters after the release of the Regional Economic Outlook report.
“Asian countries are better placed to cope with exchange rate movements today owing to fewer financial frictions and better macro fundamentals and institutional frameworks, and should continue to allow exchange rates to act as a buffer against shocks.”
The IMF forecast growth in the region would slow from 5 percent in 2023 to 4.5 percent this year and 4.3 percent in 2025, with near-term risks “broadly balanced”.
A structural slowdown in China, including a correction in its property sector, would remain a key factor in slowing growth, the IMF report said, adding that the region remained vulnerable to commodity price shocks and trade disruptions caused by conflicts in the Middle East and Ukraine.
Growth in China, the world’s second-largest economy, was projected to slow from 5.2 percent in 2023, to 4.6 percent this year and 4.1 percent in 2025.
“Policies addressing stressors in the property sector and to boost domestic demand will both help China and the region, but policies contributing to excess capacity will hurt,” Srinivasan said.
Japanese service prices are rising and bumper pay hikes offered by firms will boost household income later this year, the Bank of Japan said, underscoring its conviction the economy is making progress towards sustainably achieving its 2 percent inflation target.
The outcome of this year’s strong wage negotiations will boost salaries around summer and underpin consumption, the BOJ said in a full version of its quarterly outlook report, adding that household spending is expected to gradually increase.
The BOJ ended eight years of negative rates and other remnants of its unorthodox policy last month, making a historic shift away from decades of massive monetary stimulus that was aimed at quashing deflation and revitalizing growth.
Markets are focusing on hints on how soon the central bank could hike rates again, with many analysts betting on action sometime later this year.
Most of the Bank of Korea’s (BOK) seven board members believe that monetary policy should stay restrictive for now to bring inflation down to its 2 percent target as supply-side uncertainties persist, minutes of the April 12 meeting showed on Tuesday.
South Korea’s central bank said at the meeting that greater uncertainty on the inflation outlook and the strength of exports argued against a near-term push to cut interest rates as the bank left the policy rate steady at a 15-year high of 3.50 percent as expected.
“Looking at the economic momentum, the economy is projected to grow at the pace of its potential growth rate or stronger, while financial market conditions have been easing, which means there is no need to rush to change restrictive monetary policies,” one of the seven board members said.
Analysts expect the BOK to deliver a 25 basis-point cut in both the third and fourth quarters, taking the benchmark rate down to 3.00 percent by the end of this year.
