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IMF Warns Inflationary Risks Remain in Asia despite Growth

by Jared Heng

While exports and domestic demand are fuelling rapid economic growth in Asia, inflationary risks remain.

This was according to the International Monetary Fund’s (IMF) latest Regional Economic Outlook (REO) report for Asia-Pacific released on Thursday.

Anoop Singh, Director of the IMF’s Asia & Pacific department, said in a statement that economic growth in the region is expected to remain robust this year and next.

He added that the region’s growth is expected to be close to 7 per cent in 2011 and 2012, as it continues to lead the global recovery.

Japan’s response to the earthquake and tsunami disasters helped contain the economic impact, with spillovers to activity in the rest of Asia expected to be limited, the IMF said, adding that overall, risks to Asia’s growth outlook “are evenly balanced”.

According to the REO report, the prospects for sustained global growth have strengthened in recent quarters as uncertainties over private domestic demand in advanced economies have lessened.

However, IMF said the situation remains uncertain, amid downside risks such as the political unrest in the Middle East and North Africa, as well as fiscal and financial vulnerabilities in advanced economies, which are important trading partners for Asia.

It also cautioned that potential overheating pressures are rising within Asia, including some of the region’s property markets such as Hong Kong.  For the region as a whole, CPI inflation accelerated to about 4.5 per cent in February, mainly due to the rise of fuel and food prices, which are beginning to feed into core inflation and affect the poor, IMF said.

Headline inflation is expected to increase further in 2011, before decelerating modestly in 2012.

IMF stressed the need for further monetary tightening and macro-prudential measures in Asian economies that face growing overheating pressures “to contain credit dynamics, bring interest rates more closely in line with robust growth, and mitigate risks to the financial sector.”

In addition, “exchange rate flexibility is a key line of defence against overheating pressures,” the REO report said.

“Looking ahead, a key challenge for Asia’s policymakers remains to achieve balanced, sustainable, and more inclusive growth over the medium term,” Singh said.

He noted the need to reduce inequality through inclusive labour markets, which would guard against risks to social stability, and to develop new engines of growth by strengthening private domestic demand.