IMF tells Asian central banks not to follow Fed too closely

The International Monetary Fund urged Asian central banks to focus on domestic inflation and avoid tying their policy decisions too closely to anticipated moves by the US Federal Reserve.

Receding expectations for a near-term interest cut by the Fed have fed steady dollar gains that have pushed down some Asian currencies such as the Japanese yen and the South Korean won.

The IMF’S staff analysis showed that US interest rates have a “strong and immediate” impact on Asian financial conditions and exchange rates, Krishna Srinivasan, director of the lender’s Asia and Pacific department, said on Thursday.

“Expectations about Fed easing have fluctuated in recent months, driven by factors that are unrelated to Asian price stability needs,” he said in a briefing on the region’s outlook.

“We recommend Asian central banks to focus on domestic inflation, and avoid making their policy decisions overly dependent on anticipated moves by the Federal Reserve,” he said.

“If central banks follow the Fed too closely, they could undermine price stability in their own countries.”

The remarks underscore the dilemma some Asian central banks face as the recent Feddriven currency market swings complicate their policy path.

Bank of Korea Governor Rhee Chang-yong told a separate IMF seminar on Wednesday that fading Fed rate-cut chances have caused headwinds for the won, and complicated his bank’s decision on when to start cutting borrowing costs. The IMF expects Asia’s economy to expand 4.5 per cent this year.