Inflation fears should ease soon

GDP growth has continued to slow while markets in the region have been stressed by the acceleration in inflation. We expect inflation to top out in coming months, with the peaks generally being lower than in previous economic upswings. Policy interest rates will move up further but the tightening cycle should stop with rates at a level which does not inflict serious damage on growth. The countries where a policy mistake is the biggest risk are Vietnam and Indonesia. But elsewhere too the uncertainties over inflation and the policy response will not clear for a while. Accordingly, Asian equities will probably stay under pressure in coming months before rallying again later this year. Regional currencies will likely follow a similar trajectory.