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The financial agency cites rising interest rates as a risk to the region’s economic growth.

The International Monetary Fund (IMF) has downgraded its economic outlook for Asia as global monetary tightening, rising inflation blamed on the war in Ukraine and China’s sharp slowdown dampen prospects for a recovery in the region

While inflation in Asia remains subdued compared with other regions, most central banks need to continue raising interest rates to ensure inflation expectations do not come unstuck, the IMF said in its Asia Pacific Regional Economic Outlook report released on Friday.

“Asia’s strong economic recovery earlier this year is losing momentum, with a weaker-than-expected second quarter,” said Krishna Srinivasan, director of the IMF’s Asia and Pacific Department.

“Monetary policy will need to be tightened further to ensure that inflation returns to target and inflation expectations remain firmly anchored.”

The IMF cut its growth forecasts for Asia to 4% this year and 4.3% next year, down 0.9 percentage points and 0.8 points from April, respectively. The slowdown follows a 6.5 percent expansion in 2021.

“As the effects of the pandemic subside, the region faces new headwinds from global financial tightening and an expected slowdown in external demand,” the report said.

Among the biggest headwinds are China’s rapid and broad economic slowdown, which is blamed on strict COVID-19 lockdowns and its worsening real estate woes, the IMF said.

“With an increasing number of property developers defaulting on their debt over the past year, the sector’s access to market finance has become increasingly difficult,” the report states.

“Risks to the real estate banking system are increasing due to substantial exposure.”

The IMF expects China’s growth to slow to 3.2% this year, down 1.2 points from its April projection, after a rise of 8.1 % in 2021. The world’s second largest economy grows by 4.4% next year and 4.5% in 2024. the IMF said.

While it expects China to gradually lift strict COVID-19 restrictions next year, the IMF doesn’t see a quick resolution to Beijing’s housing crisis, which it said needed to be tackled comprehensive way to support growth.

“One would hope that with the party’s congress behind us, more attention would be paid to the political response to these,” Srinivasan said.

“But we don’t see a quick resolution of the real estate sector (crisis) because that could take longer,” he added.

As emerging Asian economies are forced to raise rates to prevent rapid capital outflows, a “judicious” use of currency intervention could help ease the burden of monetary policy in some countries, the IMF said.

“This tool could be particularly useful among shallower currency markets in Asia,” such as the Philippines, or where currency mismatches on bank or corporate balance sheets increase risks of exchange rate volatility, such as in Indonesia, he said. say the IMF.

“Currency intervention should be temporary to avoid the side effects of sustained use, which may include increased risk-taking in the private sector,” he added.