Central banks in Asia-Pacific need to contend with high inflation coupled with falling regional currencies and slowing growth, a Bank for International Settlements official said.
While many central banks in the region have raised policy rates to curb inflation, they may have to use more tools in their toolboxes, including leaning on their governments to address supply constraints and build resilient infrastructures, as well as implementing macroprudential measures that address challenges posed by external financial conditions, said Tao Zhang, chief representative for Asia and the Pacific at the BIS.
In addition, "foreign exchange-related tools including intervention, and in some cases, capital flow management should also be part of the toolbox," Zhang said on a Sept. 28 S&P Global Ratings conference call.
Like the U.S. Fed, many Asia-Pacific central banks, including regulators in Australia, India and Southeast Asia, have been raising rates to curb rising inflation and support their depreciating currencies against a strong U.S. dollar. The Russia-Ukraine war has added to inflation and economic uncertainties. Still, the Bank of Japan has held rates steady, while the People's Bank of China is still easing its monetary policy stance as it faces a slowdown in economic growth, mainly due to the COVID-19 pandemic and a troubled real estate sector.
Other headwinds
The tightening in financial conditions stemming from rising rates and the appreciating U.S. dollar has introduced additional challenges, particularly on the financial stability front, for several economies, including many in Asia-Pacific.
Although inflation in the region remains low compared with some other geographies, Asia-Pacific economies face weaker currencies, capital outflows, rising debt and disruptions to the global supply chain, Zhang added.
"Financial vulnerabilities linked to high levels of domestic debt are particularly challenging for many economies in the region," Zhang said. For example, the debt-to-GDP ratio for the governments, as well as the debt of households and companies in the region, has increased since the beginning of the pandemic.
"While monetary policy tightening can be effective in taming inflation and curbing debt building up, heavier debt service will weigh down on activities and can raise financial stability risks," Zhang added.
