ADB: Do not End Stimulus Spending as yet!

Reuters reported that the head of the Asian Development Bank warned it was too early for Asian countries to end stimulus policies started during the financial crisis and said he saw no big risk of price bubbles in China.

Haruhiko Kuroda said today that policymakers still needed to restore demand and stabilise financial systems to support the economic recovery.

China’s surprise move on Tuesday to raise bank reserve requirements was “quite appropriate” even if there were no big asset price risk in the world’s third-biggest economy.

“While we believe developing Asia is leading the global economic recovery, it is still too early to relax vigorous efforts to restore demand and stabilize financial systems,” Kuroda told a forum on the crisis.

He said the rebound in the world economy was fragile.

Asia is leading the recovery but growth is unlikely to lead to runaway inflation, Kuroda said.

“The timing of exit from policy stimulus needs to be tailored to countries’ individual situations, taking into account inflation risks where output gaps are turning positive, as well as debt levels,” Kuroda later told reporters.

Asian countries must boost internal demand to return to high growth rates and reduce poverty, with external demand likely to remain sluggish as advanced economies tread carefully back to pre-crisis growth levels, he said.

The ADB estimates developing Asia will grow 6.6 per cent this year after a 4.5 per cent expansion in 2009, with China charging ahead with 8.9 per cent growth this year

China rocked world financial markets with an increase in the amount that banks must set aside as reserves that was earlier than markets had expected. The move was likely prompted by concerns over a surge in inflation surge.

“Inflationary pressures have not been so much prominent in the Chinese economy at this moment. But in some cities, the real estate prices have risen sharply over the last several months and so the move by the Chinese central bank appeared to be quite appropriate,” Kuroda said, adding the move was not expected to undermine the V-shaped recovery.

“The monetary authorities have already adjusted slightly to a less expansionary monetary stance quite appropriately, and also the bank credit has been well supervised.”

I do hope that the policy makers can timed it right by ensuring that inflation is controlled within the ambit of a return of more steady growth. A soft approach to a better interest regime would be comforting to many.