IMF says Asia can cut rates to cushion economy from tariff shock
JAKARTA (Bloomberg): The International Monetary Fund said Asian central banks generally have room to lower interest rates to support domestic demand and offset the impact of the escalating global trade war, with the region in much stronger shape than before the Asian financial crisis.
Inflation in the region is at par or even below central banks' target ranges, which should allow more monetary easing, IMF Director of the Asia and Pacific Department Krishna Srinivasan told Bloomberg Television's Haslinda Amin on Friday.
While that could weaken currencies, especially if rates in the US stay higher for longer, "what we are advising countries is to let the exchange rate be the shock absorber, and let monetary policy provide you space you need to adjust' to the tariff shock, Srinivasan said.
The recommendation comes as US President Donald Trump's tariffs threaten to slow the global economy, with the export-driven Asian region set to be among the hardest hit.
The IMF expects Asia's economy to grow just 3.9% this year and 4% in 2026 as it suffers a "double whammy' from weaker external demand and higher US tariffs, Srinivasan said.
That represents a cumulative downgrade of 0.8 percentage point from the Fund's earlier forecasts, its sharpest adjustment since the pandemic, he said.
The new forecasts also face "significant downside risks,' depending on the outcome of trade negotiations with the US, he said.
On the plus side, he said the region's fundamentals are "much, much better' than during the 1997-1998 Asian financial crisis, when the IMF bailed out Indonesia, South Korea and Thailand.
Differences include credible policy frameworks, independent central banks and less currency mismatch in their balance sheets, Srinivasan said.
The IMF urged Asia to look towards its domestic economy to drive growth, and undertake the necessary structural reforms to stimulate consumption and investment that remain soft compared to pre-pandemic levels.
Lower borrowing costs should help bolster demand and lift countries out of deflationary territory, such as China and Thailand.
Any fiscal support should be "targeted and time-bound' since budget deficits remain high post-Covid, Srinivasan said.
--With assistance from Anand Menon. -- ©2025 Bloomberg L.P.
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