Keeping Asia from Overheating

IMF Blog, May 19, 2011

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Asia’s vigorous pace of growth has seen the region play a leading role in the global recovery.
Headline inflation in Asia has accelerated since October 2010, mainly owing to higher commodity prices.
Variations across countries reflect differences in the shares of food and energy items in expenditures.
Signs of spillovers from commodity prices to a more generalized increase in inflation:
- Expectations of future inflation have picked up.
- Accommodative macroeconomic policy stances, coupled with limited slack in some economies, have added to inflation pressures.
Inflation outlook:
- Inflation is generally expected to decelerate moderately in 2012, after first increasing further in 2011.
- Inflation risks remain on the upside due to low inventories, limited supply responsiveness, and persistent concerns about food shortages that could trigger an upward spiral in global prices.
Asset market overheating signals:
- Equity and bond markets seem in line with past norms (valuations and yields relative to historical trends), but credit growth has accelerated in recent months.
- Property prices appear relatively buoyant in some cases, particularly in certain segments of the market in China, Hong Kong SAR, and Singapore.

Monetary policy:
- The need for policy tightening in Asia has become more pressing than it was six months ago, especially in economies that face generalized inflation pressures.
- In addition to higher policy rates, exchange rate appreciation would help thwart overheating pressures by making overall monetary conditions tighter.
Capital flows and macroprudential policy:
- Capital inflows complicate policy tightening and remain an issue in a few countries, although such flows have moderated in recent months in many countries.
- The 2010 run-up of inflows raised concerns about handling a “sudden stop” or reversal of capital flows.
- Macroprudential measures could help complement the policy mix, particularly to address overheating in asset markets.
Fiscal policy and social protection:
- More fiscal consolidation would help reduce the burden to be borne by monetary tightening.
- Consolidation should allow for targeted social programs to cushion the impact of inflation on the most vulnerable groups, and to maintain sufficient fiscal space for longer-term investment needs in infrastructure and social sectors.
- Targeted spending is important for economic rebalancing and more inclusive growth, as noted by the author a couple of weeks ago.

The IMF expects Asia to continue to be a key engine of global growth over the next two years.
With overheating pressures now in clear sight, policies need to be geared toward keeping these pressures from boiling over in a way that could undermine Asia’s economic prospects and the global economic outlook.

Anoop Singh, May 19, 2011 — IMFBlog (views are those of the author and do not necessarily represent the IMF or its Executive Board).