By Leika Kihara
(Reuters) -Asia may see its resilience to U.S. tariffs challenged if a rally in the dollar and a rebound in low interest rates lead to tighter financial conditions, a senior International Monetary Fund official told Reuters.
If the U.S. Federal Reserve continues to cut interest rates, a subsequent dollar decline could allow Asian central banks to loosen monetary policy and support their economies without worrying about the risk of capital outflows, said Krishna Srinivasan, director of the IMF’s Asia and Pacific Department.
Low interest rates and declining long-term yields have also helped Asian governments and companies borrow cheaply and weather the hit from higher U.S. tariffs, he said.
But Srinivasan warned such favourable financial conditions could change.
“If interest rates start rising, especially the longer-term rates, that could have a significant impact on Asia, where debt servicing costs as a share of revenue has been pretty high. That’s a problem,” Srinivasan said in an interview conducted in Washington last week.
“If the dollar appreciates, it could affect Asia too,” he said. “Financial conditions have been very supportive, but they could change. That is a big risk for Asia.”
The interview was embargoed until the release on Friday of the IMF’s regional economic outlook report for Asia.
The IMF expects Asia’s economy to expand 4.5% in 2025, slowing from 4.6% last year but up 0.6 percentage point from its estimate in April, due to strong exports driven in part by front-loading of shipments ahead of higher U.S. tariffs.
But the report warned risks were tilted to the downside, and projected growth to slow to 4.1% in 2026.
Additional monetary easing may be expected in many countries to bring inflation back to target and ensure inflation expectations are well anchored, the report said.
Inflation in Asia has been more modest than in other parts of the world, even when a rebound in demand after the pandemic and surging raw material prices from Russia’s war in Ukraine drove up prices.
This showed how Asian central banks were able to anchor inflation expectations and bring inflation down because of public trust they were independent from government interference, Srinivasan said.
“It’s important for central banks to have independence so that they can meet their objectives, notably price stability,” Srinivasan said.
“But when you talk about independence, they should also be accountable to the public at large. It’s also important that they are not burdened with multiple mandates,” he said.
(Reporting by Leika Kihara; Editing by Lincoln Feast.)
