The central banks in Asia appear to be lagging behind the curve as far as inflation is concerned, given that the region's V-shaped economic recovery has already lifted output back to pre-crisis levels.
GDP growth plunged dramatically in most Asian economies (except China, India and Indonesia) in the fourth quarter of 2008 and the first quarter of 2009.
In the case of Thailand, GDP contracted 7.1 per cent in the first quarter of 2009 before starting to recover in the second quarter with a smaller contraction.
This prompted most Asian central banks to slash interest rates to historically low levels.
For example, the Bank of Thailand cut its policy rate to a record low of 1.25 per cent and has maintained that rate ever since.
In Taiwan, the policy rate also fell to just 1.25 per cent, while Malaysia and South Korea cut their rates to 2 per cent; the Philippines, 4 per cent; India 4.75 per cent; China, 1.8 per cent (re-discount rate) and 5.31 per cent (one-year lending rate). All these are historically lows.
However, consumption has been a key driver of these economies, rather than inventories or government spending, in the past three to four quarters.
As a result, consumption has risen above the pre-crisis levels at a rate faster than any time since the 1997/98 Asian economic crisis.
More importantly, the inflationary pressure is not just about food prices (part of headline inflation), because core inflation is also on the rise.
While these Asian economies have recovered in a V-shaped fashion, with output returning to pre-crisis levels, key interest rates in the region, except those in Malaysia, remain unchanged.
As a result, it is likely that there will be significant monetary policy tightening this year.
DBS Research suggests that there could be interest rate increases of 100 basis points to 150 basis points in most of the Asian economies this year.
India, South Korea, Indonesia and China will likely lead the way.
There has been an argument that the V-shaped recovery will come to a natural end quite soon and the inflationary pressure should also fade away.
This is not necessarily the case because real output may not grow at high rates for an extended period, but prices could however rise for a long time if the monetary policy is loose.
In other words, Asian central banks are behind the curve, except Malaysia, which recently increased its rate by 25 basis points.
Across Asian economies, the risks are biased toward more hikes rather than less, and sooner rather than later, according to the DBS Research.
Regarding Thailand, the loose monetary policy (in which the central bank's key rate remains at a historically low 1.25 per cent) is a cause of concern as inflation has been rising by as much as 8 per cent over the past seven months from minus 4.4 per cent in July 2009 to 3.7 per cent in February.
So far, policy-makers appear to have decided that it is not yet the right time to reverse the interest-rate trend because the ongoing economic recovery could be hurt, especially at a time when there is also an increased risk of political instability due to the red shirts' ongoing anti-government protests.
