Asia Economics Mid-Year Outlook: The industrial super-cycle is outweighing the energy shock

Research evidence excerpt

Asia Economics Mid-Year Outlook: The industrial super-cycle is outweighing the energy shock

Asia Pacific InsightM

Policy – A gradual and modest rate hike cycle

We still expect less rate hikes than priced in by markets: Reflecting our inflation

forecasts, we are also expecting central banks in Asia to be hiking less than what markets

are pricing in.

Highlighting four central banks with tightening bias – Japan, Australia, Korea, and the

Philippines : We see two main factors determining Asian central banks’ reaction function;

1. Starting point and persistence of inflation relative to central banks’ comfort zone

2. Sensitivity to energy shock.

On this basis, we highlight Japan, Australia, Korea, and the Philippines where we have seen

more persistent inflation in the run-up to geopolitical tensions. In the past 12 months,

headline inflation has been above the central bank’s inflation target or midpoint of target

range for between two to nine months for these four economies. For the Philippines,

Australia and Korea, the latest inflation print is also above central banks’ comfort zone

across both headline and core inflation, reflecting the higher starting point of inflation and

the larger pass-through to domestic fuel prices. Taken together, we see BOJ, BOK, and BSP

as most likely to retain/signal a tightening bias. RBA, after having tightened 75bps, is

moving into a more data-dependent mode.

Exhibit 41: Over the past 12 months, Japan, Korea, Australia, Exhibit 42: Australia, Korea, and the Philippines have the highest

and the Philippines have recorded the highest number of number of months with core inflation above central bank targets

months with headline inflation above their central bank targets Number of months core inflation has been above central