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ADB warns central banks against loosening policy grip news
16 September 2008

Mumbai: The Asian Development Bank has warned central banks and policy makers in Asia to avoid the temptation of loosening monetary policy to soothe market jitters arising from the collapse of the US investment banks.

A relaxation of monetary policies would backfire by leading to a period of low growth and higher inflation, as opposed to the high growth and low inflation in Asia's emerging economies over the past decade, Ifzal Ali, chief economist at the ADB, said.

The warning comes even as policy makers announced plans to inject billions of dollars into the banking system and pledging more help to calm markets.

In fact, Japan, Australia and India all injected funds into their money markets while Indonesia's central bank cut the rate it charges commercial banks for overnight funds and China eased curbs on bank lending.

He said, Asia's policy makers should do away with ad-hoc measures and implement structural reforms that will ensure transparency and continuity in government policy over the longer term, so that investments will keep flowing into the region.

''Otherwise you will end up in a situation of low growth, high inflation which is in stark contrast to the high growth, low inflation of the past 10 years,'' Ali said.

Speaking in Cairo, IMF head Dominique Strauss-Kahn also said the consequences on the financial sector are not over.

The financial market crisis that led to the takeover of Merrill Lynch by Bank of America and saw insurer American International Group scrambling to raise cash, triggerd bets the US Federal reserve will cut interest rates later on Tuesday.

ADB said it expects economic growth in Asia excluding Japan to slow down to 7.5 per cent in 2008 and then to 7.2 per cent in 2009, from 9 per cent in 2007.

The Manila-based ADB has trimmed down its economic growth forecasts and raised inflation projections for the Philippines. It forecast the Philippines economy to grow at 4.5 per cent and 4.7 per cent in 2008 and 2009, respectively well below the 6.0 per cent and 6.2 per cent projected in April.

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ADB warns central banks against loosening policy grip