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NEWS UPDATES Asean Affairs  22 October 2010

IMF pushes Asia to hike interest rates

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The International Monetary Fund (IMF) prodded Asian countries to normalize monetary and fiscal policies amid a buildup in inflationary pressures in the region.

With Asia set to remain an attractive destination for foreign investment given the sluggish recovery in the US and Europe, capital inflows could add further to domestic price pressures in the period ahead, the Washington-based lender said in its Regional Economic Outlook.

"We welcome the steps so far taken by policymakers to control inflation risks and limit the build-up of financial sector vulnerabilities, but more now needs to be done given the continued strong growth in the region," Anoop Singh, director of IMF's Asia and Pacific department, said.

The policy-making Monetary Board of the Philippines Central Bank has kept its overnight borrowing or reverse repurchase and overnight lending or repurchase rates at record lows of four percent and six percent since July 2009 on the back of a manageable inflation path.

The IMF pointed to the need for further tightening of monetary policy in many countries in Asia, including through greater exchange rate appreciation. A faster withdrawal of the fiscal stimulus put in place during the global financial crisis would also help guard against the risks of overheating, it said.

Should a worsening of global economic conditions negatively affect Asia, there is room to return to a more stimulative policy stance, the world's so-called lender-of-last-resort said.

"Managing capital inflows into the region is a difficult challenge. These inflows present many opportunities, but they also pose potential risks to financial stability. Macro-prudential measures have appropriately been taken in many regional economies to minimize risks, but more action may be needed," Singh said.

He said rebalancing Asia's growth remained the top policy priority over the medium term.

With external demand from advanced economies unlikely to return to pre-crisis levels in the foreseeable future, Asia will need stronger domestic demand to continue along a robust growth path, the IMF said.

A broad range of reforms are needed to support domestic consumption and investment, including strengthening social safety nets, ensuring access to credit, easing restrictions in service sectors, and improving infrastructure. Exchange rate appreciation is an important part of rebalancing, the lender said.

"It is only natural that as Asian economies grow stronger so too will their currencies. This is very much a sign of Asia's success," Singh said.

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