Learning to live with higher capital inflows

Policymakers across the region are facing a tricky balancing act. On the one hand, capital inflows are likely to remain healthy over the coming months. Additional liquidity generated by further policy easing in the developed world will be attracted into the region by its comparatively good growth prospects along with reasonably high commodity prices (in the near term at least). On the other hand, concerns about the subsequent rise in the region’s currencies are growing and it is becoming increasingly clear that policymakers will resist further nominal appreciation. This means that interest rate hikes are likely to remain off the agenda for now, replaced instead by other forms of monetary tightening, such as increased reserve requirements.