- Global: Middle East conflict and AI-driven demand have lifted inflation, but the shock looks manageable; expect divergent policy response, with Korea/Taiwan tightening and India pausing
- Singapore: We expect no change to SGD NEER policy after MAS April tightening; inflation is likely to rise from July, reflecting the lagged effects of energy shock, but a sharp acceleration is unlikely
- South Korea: We revised up our 2026 GDP growth forecast to 3.5% from 2.6%, and our 2027 forecast to 2.4% from 2.0% following stronger than expected 2Q26; we expect BOK to deliver an additional 50 bps of rate hikes over the remainder of the year, following the 25 bps increase in July
- Indonesia: Following a BI’s unexpected pause in July, we maintain our call for one final rate hike in 2H26, premised on a market repricing toward higher US interest rates
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Global: Varying calculations for central banks. Conflicts in the Middle East and the AI cycle have driven up prices this year. In its July update, the IMF projects that global inflation will rise from 4.1% in 2025 to 4.7% in 2026. These projections are less dire than initially feared when the conflict broke out. This was going to be a year of higher inflation in any case. The IMF, back in October of last year had projected global inflation to rise by 30 bps in 2026. Pass-through from tariffs, rising prices of electronics on the back of the AI cycle, and resilient demand were expected to be key contributors to the modest increase in inflation around the world. Adding war-related considerations on top of those factors, a further 30 bps increase in global inflation projection (to 4.7%) is not extreme by any means, in our view.
Granted, there will be consequences for economies and individuals at the lower end of the income spectrum. Monetary policy is already being recalibrated, exchange rates have been adjusting, but overall, compared to the inflation shock of 2022/23, this episode comes across to us as manageable. The world is bifurcated between those with heavy energy dependence and those fortunate enough to have domestic endowments of energy. Additionally, a line can be drawn between those benefitting from the AI cycle’s demand surge for hardware and those not in that manufacturing ecosystem. As we consider market and policy outlook for the rest of the year, these issues come to the fore. Take South Korea and Taiwan, both undergoing historic surges in export demand (rising presently at respective y/y rates of 70%+ and 40%+) and asset price booms. The fact that their inflation forecasts for 2026 are up only modestly should not hold back monetary authorities from tightening policy. Indeed, the time to get in the way of overheating is right now. On the other end of the spectrum is India, with considerable exposure to the commodity price surge but still characterised by within-target inflation, firmly positive real interest rates, and measures being taken to mobilise capital flows. We think this gives the RBI plenty of space to maintain policy pause. These cases point out the spectrum of monetary policy compulsions. Central banking is not one-size-fits all.
Meanwhile, the Japan Cabinet approved the “Basic Policy on Economic and Fiscal Management and Reform” on 21 Jul, establishing the Takaichi government’s top-level economic policy framework centered on a pro-growth strategy. The guideline incorporates the JPY370tn public-private investment plan through FY2040, targeting a broad range of strategic sectors, including AI, semiconductors, quantum technology, defense, aerospace, biotechnology, and advanced medicine. It sets an ambitious goal of raising nominal GDP to JPY1,100tn by FY2040, implying average annual nominal GDP growth of more than 3% and real GDP growth of above 1% over the period.
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