Fed tightening may delay Asia’s recovery

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 (IMF) official said on Tuesday.

Rising inflationary pressure, China’s economic slowdown and the spread of coronavirus cases from the Omicron variant also cloud the region’s outlook, said IMF’s Asia and Pacific Department Director Changyong Rhee.

“We are not expecting a US monetary normalisation 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 roil 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 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% from its October forecast of a 6.3% expansion. The downgrade was largely due to a hefty 0.8-percentage-point cut in China’s 2022 growth estimate to 4.8%, which reflected the impact of property sector woes and the hit to consumption from strict Covid-19 curbs.”

Published in The Express Tribune, January 26^th, 2022.

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