After enduring more than two years of currency struggles, Asia’s central banks may finally see some relief as the Federal Reserve prepares to cut interest rates by a quarter-point on Wednesday. However, the path forward for the region’s monetary policy could be uneven.
Lower rates in the US create room for central banks from Jakarta to Seoul and Mumbai to follow suit with their own cuts. The possibility of the Fed initiating a regional rate-cutting cycle has drawn investors, leading to increased investment in Asian debt and equities, which has, in turn, bolstered the region’s currencies.
The key question now for Asia’s central banks is how much, if at all, they should cut rates in the coming months. Some, like India and the Philippines, face inflation risks, while others, such as South Korea, may focus on financial stability.
“It would be a mistake to assume that the region’s policymakers are eager to begin easing monetary policy,” said Brian Tan, a senior regional economist at Barclays Plc. “It’s not clear that the economy is in dire need of easing or that policymakers need to act immediately.”
This week could provide clarity, with central banks in China, Taiwan, and Japan expected to maintain their rates. There is, however, a possibility of a cut in Indonesia. Following them, the Reserve Bank of Australia is set to make its decision on September 24, with expectations that it will also keep rates unchanged.
In mid-October, a series of central bank decisions will unfold over 10 days, with countries from India to the Philippines expected to take diverging paths. Markets and economists remain divided on what the outcomes will be.
Swap markets are currently pricing in a 50-basis point reduction for the Reserve Bank of New Zealand on October 9, with some expectation that the Reserve Bank of India may also ease on the same day.
While New Zealand is likely to continue cutting rates through 2024, as its economy flirts with a third recession in two years, analysts foresee a different scenario for other countries in the region.
Inflationary pressures in India and the Philippines are likely to keep policymakers cautious. Surveys suggest only a single 25-basis point cut is expected in the fourth quarter, with Bangko Sentral ng Pilipinas Governor Eli Remolona hinting at a quarter-point reduction in either October or December.
In South Korea, economists predict only one rate cut in the final three months of the year. Officials are closely monitoring financial imbalances, particularly those related to home prices and household loans, and may act when the property market shows signs of cooling, particularly in Seoul. Similarly, concerns over real estate troubles in Taiwan may lead policymakers there to hold off on rate cuts.
The Bank of Thailand is expected to resist pressure to lower rates until next year, as the institution maintains a conservative stance despite government calls for easing.
“Now, central banks are able to focus more on domestic idiosyncrasies when making monetary policy decisions,” said Khoon Gho, head of Asia research at Australia and New Zealand Banking Group. “For the last two years, as the Fed hiked aggressively, central banks here were reacting to currency pressures.”
Two potential game-changers loom: a US recession that could strengthen the dollar due to a flight to safety or a protectionist shift following the November presidential election, which could harm trade-dependent Asian economies.
However, neither scenario is the baseline for most economists. And even with these uncertainties, investors are still pouring money into Asia, especially if the Federal Reserve signals further rate cuts.
“If Jerome Powell and the Fed lower interest rates and suggest more are coming, that will keep the momentum going, and we’ll see more funds flowing into Asia,” said Taimur Baig, chief economist at DBS Group Holdings. “Investors have already shown their preference for a shallow easing cycle in Asia.”
