ASIAN central banks should prioritise domestic price stability and avoid basing policy decisions too heavily on expected interest rate changes by the US Federal Reserve, the International Monetary Fund (IMF) said on Tuesday (Apr 30).

Krishna Srinivasan, director of the IMF’s Asia and Pacific department, described the dilemma facing Asian central banks, highlighting that widening interest rate differentials between Asia and the US could exert downward pressure on Asian currencies, leading to exchange rate volatility.

He noted that the fading expectations of an imminent interest rate cut by the Fed have contributed to the steady strengthening of the US dollar, leading to depreciation in a number of Asian currencies against the greenback, including the Japanese yen, Indonesian rupiah and Philippine peso.

Despite the depreciatory risks, Srinivasan stressed that Asian countries are now better equipped than a decade ago to manage exchange rate fluctuations, thanks to “stronger policies, stronger macroeconomic fundamentals and better institutional frameworks”.

“These should continue to allow the exchange rate to act as a buffer against shocks,” he said, recommending the central banks to not “tie (themselves) too tight to what the Fed does, and look at what is happening in (domestic) inflation”.

Srinivasan was speaking in Singapore at the press conference following the release of IMF’s latest Regional Economic Outlook for Asia and Pacific.

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The Washington-based fund maintained its January forecast that growth in Asia-Pacific would slow to 4.5 per cent in 2024 and 4.3 per cent in 2025, after a 5 per cent expansion in 2023.

“Most activity data for early 2024 has been encouraging,” said the outlook report. “The region remains inherently dynamic and accounts for about 60 per cent of global growth.”

The fund also kept its projection on China’s economic growth to slow to 4.6 per cent in 2024 and 4.1 per cent in 2025. This is despite a 5.3 per cent year-on-year growth – which was above expectations – delivered in the first quarter of 2024.

Thomas Helbling, deputy director of the IMF’s Asia-Pacific department, attributed Q1 growth to “stronger-than-expected private consumption” and “greater contribution from net exports”.

However, he observed that the rise in consumption could be a one-off increase due to the Chinese New Year period, as the household savings rate does not appear to have gone down.

The latest IMF staff analysis shows the world’s second-largest economy to be “a source of both upside and downside risks”.

“A deeper-than-anticipated property sector correction is a downside risk, while greater-than- expected policy support is an upside risk – both could be sources of spillovers to China’s neighbours,” said the IMF report.