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According to the International Monetary Fund, Asia’s central banks may need to hike interest rates further if core inflation does not show clear indications of returning to target.
Despite a fall in headline inflation, policymakers must “remain vigilant” since the core measure, which excludes transitory and volatile items, remains over target, noted the IMF’s Krishna Srinivasan, Thomas Helbling, and Shanaka J. Peiris in a blog post published on Tuesday.
Asia has benefited from a recovery in local currencies as well as lower global commodity and transportation costs, according to the article, but statistics on second-round impacts remain mixed, they said, adding that China’s reopening may help fuel price rises.
“This means that central banks should tread carefully by reaffirming their commitment to price stability. Indeed, they may need to hike rates further if core inflation does not show clear signs of returning to target,” the IMF said. “Given the two-sided risks to inflation in Japan, more flexibility in long-term yields would help to avoid abrupt changes later,” it said.
The warning comes as several of the world’s leading central banks return to hawkish postures in the face of continuing pricing pressures, putting monetary authorities at risk of more rises.
Further rate rises are being considered by the Federal Reserve due to higher-than-expected inflation, while Australia’s central bank boosted borrowing rates to a 10-year high earlier this month as core prices rose 6.9% in the fourth quarter, beating the 6.5% projection. In India, core inflation remained over 6% for the 16th month in a row in January, prompting demands for more policy tightening.
According to the IMF’s most recent predictions, inflation will threaten Asia’s turnaround year, with economic growth expected to reach 4.7% this year, up from 3.8% in 2022. “This will make it by far the most dynamic of the world’s major regions and a bright spot in a slowing global economy,” the Fund said.
