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Business News/ Home Page / Premature for Asian central banks to tighten policy
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Premature for Asian central banks to tighten policy

Premature for Asian central banks to tighten policy

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New Delhi: It is premature for Asian central banks to begin exiting from their extraordinarily loose monetary policies given the fragility of economic recovery, a top official with the Asian Development Bank said on Monday.

Rajat Nag, managing director general of the ADB, also said the US dollar would remain a key reserve currency but that other currencies would also gain prominence over the medium and longer term.

“We do consider this as a V-shaped rather than a double-dip recovery, but the dynamics of the growth are frail. The numbers are obviously very encouraging, but they are soft," Nag told Reuters TV on the sidelines of a World Economic Forum event.

“On the one hand you certainly don’t want to choke off growth and you also don’t want to stoke inflation," Nag said.

“And this balancing act will require the central banks to be very watchful of inflation but our feeling is that, no, it is premature to talk about exiting right now."

He said countries should coordinate their exit strategies and cited the Group of 20 nations as a venue for such dialogue.

“It is important to coordinate the policy. Now, that does not mean the countries will be able to synchronise, because circumstances will be different," he said.

The multilateral lender expects developing Asian economies on average to grow 3.9% this year and 6.4% next year. The so-called Group of Three or G-3 -- Japan, the United States and the euro zone -- are projected by the bank to contract 3.7% this year and grow 1.1% in 2010.

Australia is the only country in the Asia-Pacific region or the G-20 to have raised interest rates as the global economy crawls out of its downturn, although India and South Korea are forecast to raise rates in coming quarters.

“The central banks, I think, need to use various arrows in their quiver including the quantitative restrictions -- changing the statutory reserve ratios, which is what India has done, before going into the rates themselves," he said.

Dollars and Gold

India last month bought 200 tonnes of gold from the International Monetary Fund at an average price of $1,045 an ounce, surprising markets and prompting speculation that other central banks such as China’s would buy gold to diversify reserves in the face of a declining dollar.

“I think the US dollar will remain certainly a very important currency, a reserve currency, for the foreseeable future, but I think it is also likely, and I think its almost inevitable that you will see a basket of currencies coming into that pool -- euro, yen, you know, the Chinese renminbi, in due course, and also the Indian rupee," Nag said.

“So, as the centre of gravity of economic power shifts east, you’ll obviously see many changes happening, but it’s not going to happen tomorrow. So the US dollar, I think it’s very important to recognise, will remain a very important reserve currency."

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Published: 09 Nov 2009, 01:58 PM IST
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