IMF warns U.S. rate hike could disrupt Asian capital flows

[October 07, 2016]  By Leika Kihara

WASHINGTON (Reuters) - A disorderly reaction to possible U.S. interest rate hikes could disrupt capital flows and heighten asset price volatility in Asia, the International Monetary Fund said on Thursday.

The prospect of subdued growth in advanced economies can also create negative spillovers for emerging Asian nations as weak exports weigh on the region's growth and inflation, the IMF said in a report on the Asia-Pacific region.

"Should advanced economies continue to rely primarily on unconventional monetary policies to lift growth, this could lead to excess global liquidity, fanning capital flows to emerging market economies and contributing to excessive currency appreciation and deflation pressures," the report said.

A recent slew of firm U.S. economic data has pushed up the dollar on market expectations the Federal Reserve could raise interest rates in December.

Some central banks in the Asia-Pacific region may need to weigh the pros and cons of prolonged ultra-loose monetary policy with countries like Australia, South Korea and New Zealand seeing heavy money printing boost housing prices, the report said.

The IMF welcomed the Bank of Japan's decision last month to revamp its policy framework and commit to maintaining its ultra-easy policy until inflation overshoots its 2 percent target.

"In Japan's case, monetary policy should remain focused on lifting inflation and inflation expectations through further easing if necessary and enhancing the Bank of Japan's communication framework," it said.

The IMF urged Asian economies to ensure their currency rates move flexibly. But it said foreign-exchange intervention should be considered if rapid moves threaten financial stability.

Security personnel guard the stage during a panel discussion including global financial leaders at the annual meetings of the IMF and World Bank Group in Washington, October 6, 2016. REUTERS/James Lawler Duggan

"Foreign exchange intervention could also be considered if rapid exchange rate movements are the result of illiquid or one-sided markets," the report said.

Japanese policymakers have frequently threatened to intervene in the currency market upon a yen spike, which they argued as one-sided and threatened to derail a fragile recovery.

A senior IMF official said China can continue to make progress toward a floating exchange rate over time without major disruptions to the yuan's value.

"It will continue to have bumps on the way, but I think it's reasonable to expect that they will remain successful in managing this transition well in a gradual way," Markus Rodlauer, deputy director of the IMF's Asia-Pacific department, told a news conference, when asked whether he expected another major devaluation in the yuan.

(Additional reporting by David Lawder; editing by Diane Craft and Leslie Adler)

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