Asia’s central banks are in for some relief after more than two years of currency pain, as the Federal Reserve is set to lower interest rates by at least a quarter-point. The path for the region’s own monetary policy, though, will be bumpy from here.
Officials in Jakarta raced ahead with a quarter-point cut on Wednesday, and lower rates in the US will free up space for rate setters from Seoul to Mumbai to move too.
The prospect for the Fed kicking off a regional cutting cycle has attracted investors, who have poured money into emerging Asian debt and equities, helping strengthen currencies in the region.
While regional central banks were forced to maintain a tight stance for months for fear of putting pressure on their currencies, the focus now shifts to how much and how quickly they’ll cut, or in some cases whether they ease policy at all.
Places such as India and the Philippines face inflationary risks, while South Korea may prioritise financial stability.
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“It would be an error to think the region’s policymakers are chomping at the bit for their chance to commence monetary policy easing,” said Brian Tan, Barclays senior regional economist. “It’s not obvious that the economy is just crying out for policy easing and that policymakers need to shift as soon as possible.”
Central banks in China, Taiwan and Japan are all expected to hold rates this week. They’re followed by the Reserve Bank of Australia on Sept 24, which is also expected to keep rates steady.
Then, in a 10-day spree mid-October, a swath of peers from India to the Philippines issue their own diverging decisions. Markets and economists are at odds on what that will look like.
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Swap markets are pricing in a benchmark reduction of 50 basis points (bps) for the Reserve Bank of New Zealand on Oct 9, with some chance of easing also expected for the Reserve Bank of India on the same day.
Bank Indonesia cut its key interest rate for the first time in more than three years, and Governor Perry Warjiyo said on Wednesday he expects the rupiah to strengthen further.
“The easing narrative is already entrenched and bounces in the USD could still be seen as opportunity to short vs. Asian currencies,” said Fiona Lim, senior currency strategist at Malayan Banking Bhd.
While New Zealand is likely to cut through the rest of 2024 as the economy teeters on the edge of a third recession in two years, analysts see a different picture playing out for the rest of the region.
Inflationary pressures in India and the Philippines are likely to keep policymakers there more cautious, with analysts forecasting only one 25bps cut in the fourth quarter, surveys show.
Bangko Sentral ng Pilipinas Governor Eli Remolona signalled a quarter-point cut in October or December.
Economists also see only one cut in the final three months of the year from the central bank in South Korea, where officials are keeping tabs on financial imbalances associated with home prices and household loans.
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Economists expect the central bank to cut its key rate as soon as it sees signs that the property market is cooling, particularly in Seoul. In Taiwan, as well, real estate market trouble is likely to make officials wary of cutting rates.
The Bank of Thailand will perhaps be the longest holdout, with expectations that the conservative institution will resist government calls to cut until next year at the earliest.
“Now, central banks are able to focus more on the domestic idiosyncrasies when they are contemplating their monetary policy action,” said Khoon Gho, head of Asia research at Australia and New Zealand Banking Group. “For the last two years or so, when the Fed was hiking aggressively, central banks here were really responding to that pressure on their currencies.”
Two factors may change the picture: A US recession that would strengthen the greenback in a flight to safety or a November presidential election outcome that heralds protectionist policies, hurting trade-reliant countries in the region.
The former isn’t the base case for economists, and the latter isn’t likely to halt the flow of funds into Asia assets just yet.
If US Fed Chair Jerome Powell and his colleagues reduce interest rates and signal more cuts are in the offing, that “will keep the party going and we’ll see more money coming to Asia,” said Taimur Baig, chief economist at DBS Group Holdings. “Investors have voted with their feet” for a shallow easing cycle in Asia, he said.
Charts: Bloomberg
