Asia set to ‘continue to outpace the world’, says IMF, as it asks central banks to stay focused on price stability

At a press briefing in Bangkok on Thursday, the International Monetary Fund (IMF) said Asia's central banks should be ready to raise interest rates where inflation turns more persistent or expectations start to slip.

Krishna Srinivasan, Director of the IMF's Asia and Pacific Department, said the oil shock has pushed up the price rises people expect in the near term. "As a result of the oil shocks, near-term inflation expectations have risen, but long-term expectations remain broadly anchored," he said.

Also read: IMF sees India bucking global slowdown, raises 2026 growth forecast to 7%


Even so, he said central banks cannot lose focus. "Monetary policy should continue to focus on price stability," Srinivasan said. "Central banks should communicate clearly and be ready to tighten where expectations are less anchored, frameworks are less credible, or inflation is more persistent."

He added that "the independence of central banks must be maintained".

The briefing was held at the IMF-World Bank Annual Meetings in Bangkok, along with the release of the Fund's Regional Economic Outlook for Asia and Pacific, titled "Resilience Amid Uncertainty: Can it be Sustained?" Srinivasan said three forces have shaped the region this year: the energy shock that began in February, the AI-driven technology boom, and the trade shock from the tariff hikes of 2025.

What the report says on rates

The report says near-term inflation expectations have fallen since their March and April peaks, while two-year expectations have mostly stayed anchored. But it sees signs of more price pressure, including greater pass-through of oil supply shocks.

Policymakers should be ready to tighten, it said, especially where oil prices pass strongly into consumer prices, demand from the tech boom is significant, expectations are less anchored or inflation is more persistent. The case is stronger in emerging markets, where inflation tends to last longer. Australia and Korea have already raised policy rates, and the US Federal Reserve and the European Central Bank have begun raising theirs, the report said.

The IMF's World Economic Outlook, released on Tuesday, also says the right stance depends on the country. The case for tightening is strongest in economies plugged into the technology supply chain, where inflation was above target before the war and the AI boom and still is, it said. The case for a cautious stance is strongest in energy importers outside that chain, where inflation is at or below target.

Inflation, yields and currencies

Inflation has risen across many economies, especially emerging ones, where it is nearing the peaks seen after the 2022-23 energy shock. The report said most of the recent rise comes from global energy prices and, in emerging markets, currency depreciation.

Long-term sovereign yields have risen by 40 to 60 basis points in 2026 across most Asian economies. The report expects the US monetary stance to keep tightening later this year, which, together with fiscal pressure in major advanced economies, is likely to keep Asian yields under upward pressure. Stress in the bond markets of the US, the UK, the euro area and Japan could spill over into Asia. With public debt high across much of the region, an "abrupt tightening of financial conditions" could raise debt-servicing costs, it warned.

Exchange rates and capital flows have become "more volatile since the energy shock this year", the report said. Several emerging economies, particularly Indonesia, India, Thailand and the Philippines, faced pressure on their currencies, although the pressure has partly eased over the past few months. The moves have coincided with portfolio outflows, especially of equities from Korea, even as debt inflows to the region have generally stayed robust.

Asia still grows faster than the world

"Asia's growth is projected to slow, but continue to outpace the world," Srinivasan said. He said growth is expected to ease from 5 per cent in 2025 to 4.8 per cent in 2026 and 4.4 per cent in 2027. That is 0.4 percentage point higher than the IMF's April forecast for 2026 and 0.1 point higher for 2027.

The upgrade mostly reflects the lift the AI boom has given to advanced Asian economies, whose growth is projected at 3.2 per cent in 2026, up from 2.5 per cent. Emerging Asia remains the main growth engine but is expected to slow to 5.1 per cent from 5.6 per cent as higher energy prices weigh on spending.

"Growth has surprised on the upside in India," Srinivasan said. The report projects India at 7.0 per cent in both 2026-27 and 2027-28, up 0.5 percentage point from April in each year, backed by broad-based strength in private consumption and services.

Countries that gain little from the tech boom have seen forecasts cut. Growth for low-income economies is now projected at 3.7 per cent in 2026, down from 4.4 per cent, with Bangladesh and Cambodia cut by 1.1 and 1.0 percentage points.

The region's strength has limits, Srinivasan said. "Resilience is not unlimited," he said, pointing to limited inventories and the rising fiscal cost of support measures.

Protect people, not prices

On fiscal policy, Srinivasan said public debt is still above pre-pandemic levels and room to spend is getting smaller. Debt in advanced Asia excluding Japan is set to keep rising, while debt in emerging Asia excluding China is expected to stay at a high level.

Support for people hit by the shocks should be targeted, he said. "The idea would be protect people and not prices," he said. The report said very few support measures are time-bound or clearly targeted at low-income households, and urged targeted, time-bound help over broad fuel subsidies or price controls.

Risks remain on the downside

"Risks remain tilted to the downside," Srinivasan said. A prolonged stalemate in the Middle East could keep commodity prices high, the report said. A correction in AI-related investment or stock valuations could hit Asia hardest, given its central role in the global AI supply chain. It also flagged the El Nino, with Pacific sea surface temperatures at record highs and on track for the strongest El Nino ever, which could add to food and energy inflation.

On the positive side, AI-related investment could last longer and productivity gains could come faster than expected, Srinivasan said.

The global backdrop

Globally, the World Economic Outlook projects growth of 3.1 per cent in 2026 and 3.4 per cent in 2027. Global inflation is projected at 4.7 per cent this year and 4.1 per cent next year, with oil assumed to average about $96 a barrel in 2026. The IMF warns that without rebuilt buffers, the global economy "could soon test the limits of resilience".