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 expectations are slipping.
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.
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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. Srinivasan said three forces have shaped the region this year. The first is the energy shock that began in February, which hit a region that depends heavily on oil and gas from the Middle East. The second is the AI-driven technology boom. The third is the trade shock from the tariff hikes of 2025.
In its report on the region, the IMF said exchange rates and capital flows have become "more volatile since the energy shock this year", with several emerging economies facing pressure on their currencies, according to a Reuters report. Foreign investment inflows have stayed generally robust, the report said, but they have coincided with some portfolio outflows, including from South Korean technology stocks.
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.
The report said monetary policy should be tight enough to bring inflation back to target in good time. It should tighten further where commodity prices and technology investment add to lasting price pressures, it said.
Volatile currencies and rising yields
The regional report expects the US monetary stance to keep tightening later this year. Together with fiscal pressures in most major advanced economies, that is likely to keep upward pressure on yields across Asia and the Pacific, the IMF said, according to Reuters.
It warned that stress in the bond markets of major issuers such as the US, the UK, the euro zone and Japan could spill over into Asian bond markets. That could push up yields and add to fiscal vulnerabilities that are already high. With public debt and borrowing needs high across much of the region, an "abrupt tightening of financial conditions" could raise debt-servicing costs and strain public finances further, the report said.
On central banks, the report said they should stay focused on price stability and "respond promptly" if inflation pressures become more persistent, Reuters reported. On fiscal policy, it said support should be targeted and temporary, and urged countries to avoid blanket fuel subsidies or price controls, which can be more costly.
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 higher than the IMF's April forecast of 4.4 per cent for 2026 and 4.2 per cent for 2027. He said it means Asia would contribute more than two-thirds of global growth.
The upgrade mostly reflects the lift the AI boom has given to advanced Asian economies, whose growth is expected to pick up to 3.2 per cent in 2026 from 2.5 per cent last year, Reuters reported. Emerging Asia remains the region's main growth engine but is likely to slow to 5.1 per cent from 5.6 per cent because of higher energy prices, the report said.
Growth differs a lot from country to country, he said. "Growth has surprised on the upside in India," Srinivasan said, and Korea and other tech-exporting economies have also seen upgrades. The WEO puts India's growth at 7.0 per cent in both 2026-27 and 2027-28. That is 0.5 percentage point higher than its April forecast for 2026.
Countries that do not gain directly from the tech boom have seen their forecasts cut. Low-income countries such as Cambodia and Bangladesh, and some Pacific Island countries, have had sizeable downward revisions.
Srinivasan also said the region's strength has limits. "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. 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.
Risks remain on the downside
"Risks remain tilted to the downside," Srinivasan said. He listed prolonged or renewed tension in the Middle East, a reassessment of AI-related profits and productivity, fiscal vulnerabilities, higher borrowing costs for governments, and an El Nino that could add to fiscal and inflation pressure.
The report said a prolonged stalemate in the Middle East could keep commodity prices high and run down oil reserves, Reuters reported. It also said a correction in AI demand could weigh on global growth, with the effects likely to be sharpest in Asia because of the region's deep exposure to the AI production chain.
Also read: IMF sees India bucking global slowdown, raises 2026 growth forecast to 7%
On the positive side, AI-related investment could last longer and productivity gains could come faster than expected, Srinivasan said. Better trade arrangements could also make trade more predictable.
Reforms and AI
Srinivasan named four reform priorities. These are tackling youth unemployment and skill gaps while helping workers adapt to AI, strengthening social protection, improving energy security, and deepening regional integration.
The report's first analytical chapter looks at AI and jobs in Asia. It finds that hiring for jobs exposed to AI has fallen about 10 per cent but has since stabilised. Srinivasan said this suggests AI is "reshaping work more than eliminating it", as employers look for workers with AI skills.
The global backdrop
Globally, the WEO projects growth of 3.1 per cent in 2026 and 3.4 per cent in 2027. The 2026 number is unchanged from April, and 2027 is up 0.2 percentage point. 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 says the world economy is split. Countries close to the tech boom and away from the energy shock are holding up, while energy importers outside the tech chain face higher import bills and weaker incomes. It warns that without rebuilt buffers, the global economy "could soon test the limits of resilience".