DB: Central Banks in Several Asian Countries Will Further Raise Rates to Combat Inflation and Stabilize Exchange Rates

Overview

This report presents Deutsche Bank's latest macro outlook for major Asian economies. The core conclusion is: although Asian economic growth slowed in Q2 2026, inflationary pressures have significantly risen due to soaring oil prices and supply chain disruptions caused by geopolitical conflicts (the Iran war). To prioritize price stability and exchange rate security, most central banks in Asia will adopt further or more aggressive tightening policies. The report provides detailed updates on growth, inflation, monetary policy, and exchange rate forecasts for China, India, ASEAN, and Northeast Asian economies, showing clear regional divergence.

Core views

Regarding the overall regional situation, April data shows that Asian growth has weakened but remains above trend levels. Exports remain resilient supported by investment and inventory restocking, while rising electronic manufacturing and chip prices have improved trade conditions in South Korea and Taiwan. However, inflation momentum is accelerating, with Asia's CPI expected to rise to 2.7% in 2026, triple last year's level. Against the backdrop of stalled US-Iran agreements, dual pressures of inflation and exchange rates strengthen the rationale for central banks to tighten policies further, with some countries supplementing this with administrative or regulatory measures to attract foreign capital and curb speculation. Mainland China: The 2026 GDP growth forecast was slightly lowered to 4.7%, primarily due to weak domestic demand since Q2 and minor policy adjustments. However, trade performance exceeded expectations, with export growth forecasts raised to 12%. A surge in imports suggests that subsequent exports or domestic demand may strengthen further. The reflation process is faster than expected; PPI has turned positive and is expected to average 3.5% for the year, while CPI is projected at 1.6%. Signs of stabilization in the real estate market are emerging, with increased transaction volumes and stabilized prices in second-hand housing in tier-1 cities, but a comprehensive recovery will take time. Regarding monetary policy, given that Q1 growth targets were met and liquidity is ample, the central bank is unlikely to ease further in the short term; fiscal spending intensity may rebound in the second half. The RMB is expected to appreciate steadily to 6.55/USD by year-end, accelerating its internationalization process. India: Affected by oil price shocks and monsoon uncertainty, FY27 growth forecasts were lowered to 6.7%, while CPI forecasts were raised to 4.9%. The central bank has moved up the timing of rate hikes to Oct-Dec 2026, expecting two 25bp hikes in that quarter, followed by a cumulative additional 50bp before mid-2027, reaching a terminal rate of 6.25%. This aims to maintain positive real interest rates and address the lagged risk of WPI transmitting to CPI. Fiscally, the government is buffering deficit pressures from increased fuel subsidies by cutting non-essential spending and utilizing stabilization funds, with the FY27 deficit target of 4.3% still achievable. Southeast Asia and other economies show significant divergence. Bank Indonesia is expected to raise rates by another 75bps to 6% within the year, acting pre-emptively to defend against Rupiah depreciation and imported inflation; the newly established state-owned export agency DSI brings short-term uncertainty, and fuel subsidy pressures force fiscal resource reallocation. The Bangko Sentral ng Pilipinas may hike by 50bps in June as core inflation and essential goods price pressures continue to rise; the May CPI decline is merely temporary. The Monetary Authority of Singapore is expected to raise the NEER slope from 1.0% to 1.5% in July to prevent energy cost pass-through and accelerating core inflation after Q3. The Bank of Korea may hike by 25bps in July; the semiconductor boom could push nominal GDP growth to 11% (highest since 1996), but union wage demands and a weak won exacerbate inflation stickiness. The Central Bank of Sri Lanka unexpectedly hiked by 100bps in May, with another 50bp hike possible in Q4 to stabilize the exchange rate. Taiwan's GDP forecast was significantly raised to 10.0%, benefiting from AI hardware demand and potential easing of high-end chip trade restrictions; the central bank is maintaining rates unchanged for now, but risks exist if inflation exceeds expectations. Due to inflation driven mainly by fuel and food rather than broad-based demand, the Bank of Thailand is likely to hold rates steady in 2026, with only minor tightening possible in H2 2027. Vietnam's growth is strong but constrained by infrastructure bottlenecks; the central bank continues to rely on liquidity management to balance multiple objectives.

Analysis framework

The report follows the analytical thread of 'External Shock → Domestic Transmission → Policy Response'. First, it assesses the differentiated impacts of oil price surges and supply chain disruptions caused by the Iran war on trade conditions, imported inflation, and current accounts across economies. Second, it combines domestic supply-demand gaps, wage-price spiral risks, and asset price dynamics to judge inflation stickiness. Finally, it derives the optimal policy paths for each central bank based on Taylor rules, real interest rate targets, and exchange rate stability needs. For large economies like China, special attention is paid to the impact of the real estate cycle, fiscal impulses, and structural reforms (such as anti-involution policies) on long-term growth potential.

Methodology notes

• Macroeconomic frameworkTaylor rule

  The Taylor rule model guides central bank interest rate decisions

  The report explicitly cites the Taylor Rule in the South Korea section, explaining how the Bank of Korea should adjust policy rates to maintain equilibrium when the Fed unexpectedly raises rates or domestic inflation deviates from targets. This helps readers understand that the magnitude of rate hikes is not arbitrary but has quantitative anchoring basis.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Distinguishing between price factors and actual output factors in nominal growth

  When analyzing South Korea and Taiwan, the report emphasizes that the boost to nominal GDP and trade conditions from rising semiconductor prices far exceeds actual output growth. This decomposition helps identify which economies are experiencing genuine demand-driven recoveries versus those seeing mere book prosperity driven by price effects, thereby judging the appropriate orientation of monetary policy.

• Cycle and Prosperity FrameworkInventory cycle (Kitchin)

  The disturbance of short-term economic growth by restocking/de-stocking behaviors

  The report frequently mentions that resilience in Asian exports and investment benefits from 'restocking', attributing the surge in Vietnam's imports to electronic component replenishment. Understanding the inventory cycle helps investors distinguish between trend growth and cyclical fluctuations, avoiding misjudging short-term restocking as long-term demand improvement.

• Fixed Income and Credit AnalysisSpread and Asset Quality

  The relationship between real interest rates and exchange rate stability

  The report repeatedly emphasizes maintaining 'positive real interest rates' or 'sufficient spreads' in countries like India, Indonesia, and Sri Lanka to attract capital inflows and stabilize local currencies. This reveals that emerging market central banks raise rates not just to suppress domestic inflation, but also to prevent capital flight and currency crises in a global rising interest rate cycle.

Key data

• Asia 2026 GDP Growth Forecast5.2%Slowed from 5.5% in 2025, but still above trend levels
• Asia 2026 CPI Forecast2.7%Approximately three times that of 2025, reflecting oil price shocks and accelerating inflation momentum
• China 2026 GDP Growth Forecast4.7%Lowered by 0.2 percentage points from previous forecasts, but higher than the 4.5% in last year's global outlook
• China 2026 Export Growth Forecast12%Significantly raised from the previous 6%, driven by AI investment, green transition, and market share expansion
• India FY27 Terminal Repo Rate Forecast6.25%Hike timing moved up to Oct-Dec 2026, cumulative hike of 100bps
• South Korea 2026 Nominal GDP Growth Forecast11%Strongest since 1996, driven jointly by semiconductor prices, weak won, and high inflation
• Taiwan 2026 GDP Growth Forecast10.0%Raised from 9.0%, mainly due to AI hardware demand and potential easing of chip trade restrictions
• Singapore NEER Slope Forecast (July)1.5%Raised from 1.0%, to prevent accelerating core inflation after Q3

Impact & implications

For Asian financial markets, the report's views imply that interest rate divergence within the region will continue to widen: economies facing pressure for rate hikes such as India, Indonesia, the Philippines, and South Korea may see further upward movement in bond yields, with stock valuations under pressure but banking stocks potentially benefiting from widened net interest margins; while economies maintaining loose or neutral stances like China and Thailand offer relatively friendlier bond markets, though exchange rate volatility risks must be monitored. For multinational corporations and exporters, improving trade conditions in the semiconductor and electronics supply chains benefit South Korean and Taiwanese suppliers, but compliance costs and delivery delays brought by Indonesia's new export agency DSI need attention. For Chinese investors, signals of real estate stabilization and accelerating reflation may provide阶段性 opportunities for cyclical stocks, but domestic demand recovery still requires sustained policy efforts. Overall, Asian asset allocation needs to pay more attention to country selection and inflation hedging, making simple long-only regional index strategies less effective.

Risks

• Escalation or prolongation of the Iran war leading to oil prices remaining consistently above expectations, triggering more severe stagflation risks
• US trade policies (such as USTR Section 301 investigations) causing unexpected shocks to export-oriented Asian economies
• El Niño phenomenon leading to agricultural yield declines in South and Southeast Asia, pushing up food inflation and triggering social instability
• Unexpected aggressive rate hikes by the Fed forcing Asian central banks to follow passively, exacerbating financial condition tightening and local currency depreciation pressures
• Real estate stabilization in China falling short of expectations or worsening local finances dragging down the domestic demand recovery process
• Chaotic execution of Indonesia's new state-owned export agency DSI leading to interruptions in commodity exports and loss of fiscal revenue

What to watch

• Central bank meeting resolutions and forward guidance (especially the RBI June meeting, BSP June meeting, and MAS July meeting)
• Progress of US-Iran negotiations and Brent crude oil price trends
• High-frequency data on China's real estate (transaction volumes and rent changes in second-hand housing in tier-1 cities) and the pace of fiscal policy implementation
• Indian monsoon rainfall conditions and changes in food price indices
• Results of South Korean union wage negotiations and the transmission of services sector inflation
• Operational details of Indonesia's DSI institution and actual flows of coal/palm oil exports
• Legislative progress regarding proposals for universal cash handouts in Taiwan
• Progress of public investment disbursement in Vietnam and revisions to infrastructure reform bills