The International Monetary Fund indicated that, in general, Asian central banks have enough room to reduce interest rates in order to bolster domestic demand to offset the effects of the intensifying global trade war, and that the region is in strong shape compared to pre-Asian financial crisis levels.
Inflation in the region is at or even below central banks’ targets, which should provide more scope for monetary easing, Krishna Srinivasan, IMF Director of the Asia and Pacific Department, said in an interview with Bloomberg Television’s Haslinda Amin on Friday.
While this could cause further depreciation of Asian currencies amidst further rate hikes in the US, especially if higher rates in the US persist “what we are advising countries is to let the exchange rate be the shock absorber, and let monetary policy provide you space you need to adjust” to the tariff shock, Srinivasan said.
This recommendation comes as US President Donald Trump's tariffs are expected to further slow global growth, and the export-driven Asia region could be amongst the hardest hit. In a double-whammy to its economy from weaker external demand and higher US tariffs, the IMF expects Asia to grow just 3.9% this year and 4.0% in 2026, Srinivasan stated.
That reflects a net downgrade of 0.8 percentage points from the Fund's previous projections, and the biggest downgrade since the pandemic, he said. The new projections are subject to "significant downside risks" as well, entirely dependent on potential trade negotiations with the US, he said.
On the upside, he said the region's fundamentals are "much, much better" than they were while confronting the Asian financial crisis of 1997-1998 when the IMF had to bail out Indonesia, South Korea, and Thailand. Among the differences is credible policy frameworks in place, independent central banks, and considerably less currency mismatches in their balance sheets, Srinivasan said.
The IMF pressed Asia to look towards its domestic economy to generate growth, and pursue structural reforms needed to increase consumption and investment, which lag much lower than their pre-pandemic numbers.
Lower borrowing costs should help bolster demand, and help countries like China and Thailand emerge from deflationary territory. Any supportive fiscal measures should be "targeted and time-bound," as governments are currently operating at high budget deficits following Covid, Srinivasan said.