IMF warns Asian central banks on inflation even as 2026 growth outlook rises

The International Monetary Fund (IMF) delivered a stark warning to Asia’s central banks on October 15: prepare to raise interest rates if stubborn inflation persists or price expectations begin to drift.

Speaking at a press briefing during the IMF-World Bank Annual Meetings in Bangkok, Krishna Srinivasan, Director of the IMF's Asia and Pacific Department, warned that a severe energy shock has altered near-term inflation dynamics across the region. The briefing coincided with the release of the Fund’s Regional Economic Outlook for Asia and Pacific, titled "Resilience Amid Uncertainty: Can it be Sustained?"

"As a result of the oil shocks, near-term inflation expectations have risen, but long-term expectations remain broadly anchored," Srinivasan said. "Monetary policy should continue to focus on price stability. Central banks should communicate clearly and be ready to tighten where expectations are less anchored, frameworks are less credible, or inflation is more persistent."

Srinivasan also emphasised that "the independence of central banks must be maintained."

Three forces have shaped Asia’s economy this year: the energy shock that began in February, an unprecedented AI-driven technology boom, and trade friction from the 2025 tariff hikes. While inflation expectations have eased from their March and April peaks, the IMF highlighted growing price pressures driven by the strong pass-through of global oil shocks and currency depreciation.

Central banks in Australia and Korea have already raised policy rates, joining tightening cycles by the US Federal Reserve and the European Central Bank. The IMF noted that the case for rate hikes is strongest in emerging markets and technology-exporting economies, whereas energy importers outside the tech supply chain face a more cautious outlook.

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Financial markets are already under strain. Long-term sovereign yields have risen 40 to 60 basis points across most Asian economies in 2026. Higher US interest rates and advanced-economy fiscal pressures threaten to push Asian yields higher, raising debt-servicing costs across heavily indebted nations. Currencies in Indonesia, India, Thailand, and the Philippines have also faced heightened volatility alongside equity capital outflows, though debt inflows have remained resilient.

Despite these head winds, Asia continues to lead global expansion.

"Asia's growth is projected to slow, but continue to outpace the world," Srinivasan said.

Regional growth is projected to ease from 5 percent in 2025 to 4.8% in 2026 and 4.4% in 2027. The 2026 forecast marks a 0.4 percentage point upgrade from April, lifted by AI-driven demand in advanced Asian economies, where growth is projected at 3.2%.

Emerging Asia is expected to slow to 5.1% as energy costs weigh on consumption, but India remains a clear bright spot.

"Growth has surprised on the upside in India," Srinivasan said. The IMF upgraded India's growth projection to 7.0% for both 2026-27 and 2027-28, driven by robust private consumption and services.

Conversely, low-income economies missing out on the tech surge saw their 2026 growth outlook cut to 3.7%, with Bangladesh and Cambodia downgraded by 1.1 and 1.0 percentage points, respectively.

Srinivasan warned against complacency, noting that "resilience is not unlimited" amid shrinking fiscal buffers. On fiscal policy, he urged governments to avoid broad fuel subsidies in favor of direct relief.

"The idea would be protect people and not prices," he said.

Looking ahead, the IMF warned that risks remain tilted to the downside, including prolonged Middle East tensions, potential valuation corrections in AI hardware stocks, and record-strength El Niño weather patterns.

Globally, the IMF projects growth at 3.1% in 2026 and 3.4% in 2027, with inflation averaging 4.7% this year based on oil at $96 a barrel. Without rebuilt policy buffers, the IMF warned, the global economy could soon test the limits of its resilience.