Some economies in developing Asia have cautiously resorted to easing their monetary policy in an effort to counter the downward cycle caused by weak global demand in 2012. After an episode of monetary...
tightening to stem rising inflationary pressure in 2010–2011, central banks cautiously reversed their policy stance in 2012 to prod domestic demand and thus compensate for slower global economic activity caused by renewed concerns about the debt crisis in Europe (Figure 1.4.3).
The major industrial economies are likely to continue their ultra-accommodative monetary policy, as they are not expected to enjoy a rapid turnaround within the forecast horizon
(see Annex: Consolidation in advanced economies). In the meantime, the central banks of industrial economies will keep their policy rates near zero and continue pouring liquidity to their economies. The global spillover of this excess liquidity raises concerns of asset bubbles building up
During the forecast period, monetary policy is expected to have a limited role to play in stimulating economic activity in developing Asia. With output gaps hovering around zero and global liquidity expanding, the authorities should instead monitor their short-term economic development carefully and stand ready to stabilize aggregate demand should the economy tip toward overheating. Although inflation still looks benign, a slow buildup of inflationary pressure is anticipated, in particular in the PRC, Indonesia, the Philippines, and Thailand. Monetary policy is better kept neutral at this juncture, but central banks should be vigilant against the sudden return of inflation. Some fine-tuning in monetary management may be required to avoid overheating in economies that are already close to their long-term trend growth. Countries with high inflation and structural imbalance should prioritize stabilization. Governments in Asia need to be careful that the surge in capital inflows does not fuel excessive rises in asset prices while, at the same time, being prepared for a possible reversal in monetary flows should investor sentiment reverse. The current global environment of excess liquidity demands that the authorities watch crossborder financial transactions closely and consider their implications for the soundness of the banking sector. Macroprudential policy should be tightened when necessary.
- PRC = People’s Republic of China.
Source: CEIC Data Company (13 March 2013).
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