Asia central banks may need to keep hiking if core inflation stays high, IMF says

Asia's central banks may need to raise interest rates further if core inflation does not show clear signs of returning to target, according to the International Monetary Fund.

Policy makers must "stay alert" despite a slowdown in headline inflation, as the core gauge — which strips out transitory and volatile items — still runs above target, IMF's Krishna Srinivasan, Thomas Helbling and Shanaka J Peiris wrote in a blog post published on Tuesday.

Asia has benefitted from a rebound in local currencies and the easing of global commodity and shipping costs but data on second-round effects remain mixed, they said in the post, adding that China's reopening may also stoke price gains.

"This means that central banks should tread carefully by reaffirming their commitment to price stability. Indeed, they may need to hike rates further if core inflation does not show clear signs of returning to target," the IMF said. "Given the two-sided risks to inflation in Japan, more flexibility in long-term yields would help to avoid abrupt changes later," it said.

The warning comes as many of the world's major central banks pivot back to their hawkish stances amid persistent price pressures, putting monetary authorities potentially in play for further hikes. 

Federal Reserve officials said larger rate hikes are back on the table amid hotter-than-expected inflation, while Australia's central bank raised borrowing costs to a 10-year high earlier this month as core prices in the fourth quarter surged 6.9% — exceeding the 6.5% forecast. Core inflation also stayed above 6% in India for a 16th month in a row in January, spurring calls of more policy tightening to come.

A resurgence in inflation will pose a threat to what should be a turnaround year for Asia, with economic growth poised to hit 4.7% this year from 3.8% in 2022, according to the IMF's latest forecasts. "This will make it by far the most dynamic of the world's major regions and a bright spot in a slowing global economy," the Fund said.