The International Monetary Fund has warned that Asian economies were at risk of overheating as strong capital inflows fan inflationary pressures and raise the risk of damaging bubbles.
IMF urged regional leaders to return to more normal monetary policies after the global financial crisis, and increase the flexibility of their exchange rates to counter speculative funds flowing into their economies.
IMF said in its latest report on the regional outlook that "Brighter economic growth prospects and widening interest rate differentials with advanced economies are likely to attract more capital to the region."
It added that "This could lead to overheating in some economies and increase their vulnerability to credit and asset price booms with the risk of subsequent abrupt reversals."
IMF raised its growth forecasts for Asia to 7.1% for both 2010 and 2011, higher than its prediction last week when it estimated regional economies would expand an average 6.9% in 2010 and 7% in 2011.
But IMF warned export driven Asia remained vulnerable to a slower than expected recovery in the West, and urged governments to reduce their reliance on overseas shipments and boost domestic consumption. It said Asian policymakers need to safeguard against the build up of imbalances in asset and housing markets caused by excess liquidity and one way to do this was to adopt more flexible exchange rates.
IMF said, without specifically referring to China, that "Letting the exchange rate appreciate can forestall short term inflows. Without more currency appreciation, the pressure to sterilize the impact on money supply will continue."