IMF: Asian countries can alleviate tariff shocks by cutting interest rates

According to the Zhitong Finance APP, the International Monetary Fund (IMF) stated that central banks across Asia generally have room to cut interest rates to support domestic demand and offset the impacts of the escalating global trade war. The economic conditions in the region are much more robust than before the Asian financial crisis. Krishna Srinivasan, Director of the IMF's Asia and Pacific Department, stated on Friday that inflation levels in the region are stable or even below central bank target ranges, which provides conditions for monetary easing. He mentioned that while interest rate cuts may weaken local currency exchange rates (especially in the context of prolonged high U.S. interest rates), "we recommend that countries allow exchange rates to act as buffers, providing room for adjustment through monetary policy to respond to tariff shocks." This recommendation comes at a time when U.S. President Trump's tariff policies threaten global economic growth, with export-oriented Asian regions likely to be the hardest hit. Srinivasan noted that due to the "double whammy" of weak external demand and increased U.S. tariffs, the IMF expects the Asian economy to grow only 3.9% this year, with a growth rate of 4% in 2026. He pointed out that this represents a cumulative downward revision of 0.8 percentage points from the organization's previous forecast, marking the largest adjustment since the pandemic. The new forecast also faces "significant downside risks," depending on the outcome of U.S.-China trade negotiations. Srinivasan stated that a positive factor is that the region's fundamentals are "much more robust" than during the 1997-1998 Asian financial crisis, when the IMF provided assistance to Indonesia, South Korea, and Thailand. Differences include credible policy frameworks, enhanced central bank independence, and reduced currency mismatches in balance sheets. The IMF urged Asian countries to shift towards domestic demand-driven growth and to advance necessary structural reforms to stimulate consumption and investment, which remain below pre-pandemic levels. Lowering borrowing costs should help boost demand and help countries like Thailand escape deflation. Srinivasan emphasized that given the high fiscal deficits in the post-pandemic era, any fiscal support should be "targeted and time-bound."