ADB head points to monetary policy dilemma in Asia amid inflation

Asian Economic News, July 7, 2008

TOKYO, July 4 Kyodo

Asian Development Bank President Haruhiko Kuroda on Friday pointed to a ''growing dilemma of monetary policy'' in Asian countries that face upward price movements, saying interest rate hikes to combat inflation could increase hard-landing risks of their economies.

Noting the continued rise in energy and food prices is ''of most concern at the moment'' for Asian economies, Kuroda told a press conference at the Foreign Correspondents' Club of Japan that many countries are concerned about ''how to gauge the right mix to control rising inflation without excessively slowing economic growth.''

Tightening central banks' credit grips ''may hamper domestic demand growth'' in those economies and large interest rate differentials between the United States and emerging Asian nations ''may attract volatile portfolio investments and fuel asset-price inflation, increasing the risk of a hard landing.''

The U.S. Federal Reserve had until recently cut its key rate repeatedly to 2 percent, while inflation rates in China and India are above 7 percent and the rate topped 20 percent in Vietnam.

Widening interest rate gaps ''would of course encourage capital flows moving around between financial markets,'' Kuroda said. ''Central banks are advised to closely monitor interest rate differentials and capital movements across the borders.''

But at this moment, central banks in the region ''have successfully tightened their monetary conditions to contain inflation pressures'' through such measures as rate hikes and reserve requirements.

Kuroda, a former Japanese vice finance minister for international affairs, was basically upbeat about the overall Asian economic condition.

Although growth in emerging Asia ''will slow somewhat'' with possible downward revisions in the bank's outlook for regional economic growth in 2008 and 2009 to be released by September, he said, ''On the whole, the economic growth in emerging Asia is quite robust.''

Kuroda said the aggregate growth rate in the region could be lowered by 1 or 2 percentage points from 8.7 percent in 2007, but that would not cause any significant slowdown for the area.

The ADB forecast in its April report that developing Asia's economy will expand 7.6 percent in 2008 and 7.8 percent in 2009. The 8.7 percent growth in 2007 was its fastest expansion in almost two decades.