Despite discounting the surge in inflation as temporary, the Fed has signaled a more hawkish bias by raising its two-year-ahead interest rate forecast. Asian fixed income and currency markets have also remained on edge amid heightened uncertainty about its tapering. This comes just as Asia is slowly emerging from its worst Covid-19 outbreaks since the beginning of this year. In Q2, Asia’s mobility declined sharply amid tightened social distancing measures, weighing on recovery in domestic demand, albeit the region continued to benefit from a strong growth impulse from abroad. In fact, G3 growth is likely to run well ahead of Asia’s from Q3 and onwards.

Within Asia, the Bank of Korea stands out with its hawkish shift. In fact, it is likely to start its monetary policy normalization in October, with risks tilted to the upside.

This shift comes as the government is preparing to provide another fiscal boost to the economy. While headline inflation rates haven't risen as much in most Asian economies as they have in the US or Euro Area, they have risen notably, together with core inflation in South Korea. The latter has increased in China too, where we expect the People's Bank of China to deliver a rate hike in Q1, assuming that the government eases the fiscal drag, allowing for sequential growth in 2H.

Ahead of the PBoC stands the Reserve Bank of India, which we expect to move quickly this year to remove monetary accommodation, in the face of stubbornly high inflation. In Q3, we expect RBI to increase the size and maturity of VRRR auctions to mop up excess liquidity at higher marginal rates, followed by a 40bp increase in the reverse repo rate, with the policy rate corridor raised by 50bps early next year.

Despite a lack of signs from the central bank, we see a weaker peso and an upward turn in inflation prompting Bangko Sentral ng Pilipinas to relent and hike rates in Q2.

Within Asia, Bank Negara Malaysia and the Bank of Thailand are the least likely central banks to deliver rate hikes before Q4 2022, even in the face of greater-thanexpected pressure on their currencies.

In this edition of AMI, we also take a close look at each of the economies we cover in Asia.