Interest rates and inflation to remain low

Growth in China will weaken further over the coming year as a downturn deepens in industry and construction. The outlook for the rest of the region is improving. We expect many economies to rebound strongly as governments ease restrictions on the back of faster vaccine rollouts and success reining in COVID outbreaks. Central banks – unlike in much of the emerging world – are in little rush to tighten. Inflation hasn’t emerged as a concern and, with large output gaps set to keep a lid on price pressures, we expect policy rates in most countries to remain on hold over the coming year. In contrast, the consensus and financial markets are expecting central banks to begin tightening in 2022.
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Emerging Asia Data Response

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August rate hike in Korea, Indonesia outbreak

We were already more hawkish that the consensus in expecting a rate hike in Korea this year, but recent comments by the central bank and strong economic data mean we are shifting forward our forecast for the first hike to the Bank of Korea’s meeting on 26th August. Meanwhile, Indonesia’s government has introduced tough new restrictions to combat a jump in virus cases. Despite the worsening outlook, there is little prospect of monetary or fiscal policy being loosened further to support demand.

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Asia’s emergence from the pandemic has been threatened recently by a resurgence in infections across parts of the region. Most of South Asia, the Philippines and Thailand have had to introduce new restrictions to contain outbreaks of the virus, and we have cut our growth forecasts for a number of countries to reflect the worsening outlook. Elsewhere, China and Taiwan have already fully recovered from the crisis, while Vietnam is not far behind. Headline y/y growth rates in these economies will be flattered by base effects over the next couple of quarters, but in q/q terms growth will continue to slow. Central banks across the region are in no rush to tighten monetary policy. External factors won’t compel policymakers to tighten, and with inflationary pressures very weak, interest rates are likely to be kept low to support economic recoveries.

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