Measured against headline inflation, as is well known, real interest rates are falling. Central banks simply have not raised rates in line with headline inflation. But measured against core inflation, real rates are still falling, but not as quickly. But even the latter measure suggests policy is overly accommodative today. Whereas central banks were trying to tighten monetary conditions in 2007, today's real rates (against core inflation) are generally much lower - on average nearly 150bps - than they were in 2006-07.

In Figure 17 we have ranked the economies from left to right in descending order of the gap between current real rates and where they were on average in 2006-07 when central banks were last tightening policy. So in India, the real rate measured this way is 283bps below where it was when they were last tightening policy in 2006-07. In South Korea, real rates are 267bps too low and in China, real rates are about 120bps too low judged this way.

Our expectation is that the preference of central banks is to close this gap gradually over the next year or two (assisted by the Fed rate hikes in 2012 which will take the pressure off Asian currencies as rates go up). But even the rate hikes that would be required to return real rates to where they were in 2006-07 are well above consensus expectations or what is priced in.

The danger, moreover, is that food and fuel inflation remain high for longer than expected and that with stronger growth the pass-through from commodities to core inflation will get stronger. In our view, for example this is what has happened in India - so even while food inflation falls in India, the policy response has been too slow to contain core inflation which has risen to 7.2% in March from 5% in January.

Eoin Treacy's view Asian central banks have generally walked a fine line between promoting growth through competitive exports and attempting to stifle inflationary pressures. China, India, Australia, Indonesia, Malaysia, Philippines, South Korea, Singapore and Taiwan have all begun to raise interest rates or widen currency trading bands over the last year. However, absolute levels are still low by historical standards and such has been the pace of economic growth that upward pressure on wages is beginning to emerge. The above countries are likely to continue to lead in terms of monetary policy normalisation.

The Asian Dollar Index remains in a consistent medium-term uptrend. A sustained move below the 200-day MA, currently near 115 would be required to begin to question medium-term upside potential. The Australian Dollar Trade Weighted Index has a relatively similar pattern. The New Zealand Dollar Trade Weighted Index has been largely rangebound, albeit with a mild upward bias, for much of the last 18-months. It has rebounded well from the March sell off and a sustained move above 136 would indicate a return to medium-term demand dominance.