Fed hike in interest rates could delay recovery in Asia, IMF warns

Interest rate hikes expected by the U.S. Federal Reserve could delay emerging Asia’s economic recovery and keep pressure on policymakers to hedge against the risk of capital outflows, a senior official said on Tuesday. of the International Monetary Fund.

Growing inflationary pressure, China’s economic slowdown and the spread of Omicron-variant coronavirus cases are also clouding the region’s outlook, said Changyong Rhee, director of the IMF’s Asia and Pacific department.

“We don’t expect U.S. monetary normalization to cause big shocks or capital outflows in Asia, but emerging Asia’s recovery could be delayed by rising interest rates and leverage. world,” he told Reuters in a written interview.

As concerns over a more hawkish Fed rattle global markets, investors expect the U.S. central bank to signal Wednesday its intention to raise rates in March. Markets have forecast a total of four rate hikes this year.

Rhee said there is a risk that US inflation will turn out higher than expected and require “faster or greater” monetary tightening from the Fed.

“Any miscommunication or misunderstanding of these changes can cause a flight to safety, increase borrowing costs and lead to capital outflows from emerging Asia,” he said.

In a World Economic Outlook update released on Tuesday, the IMF cut emerging Asia’s growth projection for 2022 to 5.9% from its October forecast of a 6-year expansion. 3%.

The downgrade was largely due to a sharp 0.8% drop in China’s growth estimate for 2022 to 4.8%, which reflected the impact of the housing sector’s woes and the impact on consumer spending. strict restrictions related to COVID-19.

“China is still the factory of the world. China’s weakening domestic demand will also reduce neighboring countries’ external demand in general,” Rhee said.

Asia could also see inflation emerge among the risks this year, unlike last year when delays in the economic recovery, as well as moderate gains in energy and food prices, kept the economy going. moderate inflation compared to other regions, he said.

“In 2022, as the recovery strengthens and food prices rebound, the lingering impact of high shipping costs could end the benign inflation that Asia enjoyed in 2021,” Rhee said. .

“Global energy prices are expected to stabilize in 2022 after a sharp rise in 2021, but have been volatile lately.”

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