Asia overheating risk looms – IMF

10/10/2010 | Anthony Rowley

A senior IMF official called for an “accelerated” pace of exit from monetary and fiscal stimulus yesterday, amid fears over overheating in Asia’s booming economies

The danger of overheating in Asia’s booming economies was highlighted yesterday by a senior IMF official, who called for an “accelerated” pace of exit from monetary and fiscal stimulus.

Anoop Singh, director of the IMF’s Asia and Pacific Department, said: “Inflationary pressures have continued to build up in the region.”

He called on countries to employ exchange rate appreciation and possibly capital controls to counter destabilizing inflows, and to avoid asset bubbles.

Output is growing faster than expected across emerging Asia, said Singh, pointing to the IMF’s latest forecast of 8% growth across the region this year, easing to 7% in 2011. China is forecast to expand by 10-10.5% this year and 9.75% in 2011.

This surge in output, and a narrowing of output gaps, is creating domestic price pressures and also drawing in capital flows that exacerbate price pressures.

Rising inflation in Asia is partly due to high prices of commodities, especially food – but core inflation is also rising and “signs of price pressure have also emerged in property markets in several economies,” Singh said.

“House prices in several economies – China, Hong Kong and Singapore – are growing up at double digit rates,” he pointed out. “In China, a property bubble appears to be inflating in some of the larger cities.”

The sluggish pace of recovery in advanced economies, coupled with concerns about the quality of sovereign debt in some of them and low interest rates, “suggest that Asia will remain an attractive destination for foreign capital”.

These capital flows could intensify strongly, given that there is “still sizeable scope for asset reallocation to emerging markets,” he said.

“The most pressing challenge for Asia is to manage the exit from policy stimulus,” said Singh. Some exit strategies have been implemented but in general “fiscal and monetary policy is still accommodative,” he added.

Singh pointed to “excessively easy domestic financial conditions” in parts of Asia, and suggested that “a further tightening of monetary policy conditions, may be needed, including exchange rate appreciation.”

It is “in Asia’s own interest” that exchange rates should be allowed to appreciate, argued Singh, saying that this was an “important component” of economic rebalancing.

“It is only natural that, as Asian economies strengthen”, so too their currencies would need to be stronger.

The pace of exit “also remains gradual on fiscal policy”, he said. “A faster withdrawal of fiscal policy would help guard against the risks of overheating and a build up of financial imbalances.”

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