Will Asian Central Banks Mirror a Fed Rate Cut?
As the US Federal Reserve (Fed) reduce borrowing costs, we gauge whether Asia will do the same and the potential impact on the region.
Amid easing inflation, the Fed has commenced reducing interest rates. However, the pace and size will be mainly determined by the state of the labor market and the economy's strength. This transition from restrictive to looser monetary policy will give central banks in some Asian markets the latitude to reduce their borrowing costs, too.
Most Asian markets raised their interest rates in tandem with the Fed, which primarily ensured currency stability or the avoidance of a disruptive devaluation and supported investor confidence. Now that the Fed is shifting its stance, central banks across Asia could either follow suit or, in some cases, leave borrowing costs unchanged. That being said, central banks will need to tread a fine line – interest rates must be high enough to contain inflation and maintain currency stability but not so high that it dampens economic activity.
The Asian Central Banks Most Likely to Cut Interest Rates
Monetary policy divergence exists across the region. The Philippines has already started to trim its interest rates despite inflation remaining relatively elevated .1 Thailand and South Korea are likely to be the next to cut theirs. In Thailand, recent political changes make the outlook a little unclear, but the Bank of Thailand considers its current interest-rate setting of 2.5% neutral .2 Inflation appears well-contained, so policymakers will likely look to ease borrowing costs when the political backdrop stabilises and if economic data is considered supportive.
The Bank of Korea has indicated that it will look to reduce interest rates in the future as the current level of 3.5% is considered economically restrictive, and inflation is under control.3 Domestic concerns about heat in the real estate market also pressure the central bank, as lower rates risk further inflating property prices.
Bank Negara Malaysia has said that it expects to keep interest rates steady at 3%.4 The economy is performing relatively strongly, and inflation is being held in check. However, currency stability is a key concern. This comes after the Malaysian ringgit fell to a 26-year low against the US dollar in February 2024, although in recent months, it has recovered.5
China Forges Its Own Path
The situation in China differs from most other Asian markets as its size and capital controls mean it is not compelled to follow the Fed in terms of monetary policy. Instead, the People’s Bank of China focuses more on deflation than inflation. Interest rates have been reduced, and other policy changes are encouraging lending to help stimulate the economy.6 Deflation can become reinforcing as consumers and businesses reduce their spending on goods, believing they can buy them more cheaply in the future. Recent data showed consumer inflation as slightly positive, but producer price inflation remained negative.7
The property sector in China is also experiencing price falls in certain areas. Some in China have used property as a way of storing or accumulating wealth, which means declines in prices may reduce people's propensity to spend as their property wealth diminishes. Despite these challenges, China’s economy is expected to grow by around 5% in 2024.8
India Powers Ahead
India’s economy is expanding rapidly, but rising prices remain a challenge. Despite moderating core inflation, food prices have increased, compelling the Reserve Bank of India to maintain interest rates at 6.5%.9 Food-related inflation can be politically sensitive as it is readily apparent to people who may not notice price increases in other goods and services. While India’s borrowing costs rate may seem high compared to other Asian markets, they do not appear overly restrictive when inflation of around 5% and an expected economic growth rate of 8.2% in 2024 are considered.10
India's growth stems from a large and relatively young workforce, a growing middle class, structural reforms, improved integration into global supply chains, and an improved business environment.11 According to a recent World Bank report, the outlook for further growth remains positive, and there is room for improvement if trade barriers are lifted.12
Foreign Investors Return to Select Markets
This year, the Malaysian ringgit’s recovery has encouraged foreign investors to increase their sovereign and local-currency corporate bond holdings. Bank Negara Malaysia estimates that 20% of all locally issued bonds are now held by foreign investors – in July 2024 alone, they purchased US$1.75 billion.13 Looking at most other regional markets, we see similar inflows from overseas buyers, with India alone attracting inflows of US$2.68 billion in July 2024.14
A US Soft Landing Would Be Positive for Asian Markets
Whether the Fed will reduce interest rates at the pace and magnitude necessary to avoid a recession remains to be seen. Recent data points to the employment market softening and inflation, which, according to the Fed’s measure, is 2.5%, is only slightly above the US central bank’s 2% target.15 Assuming the Fed successfully achieves a soft economic landing, global trade levels should remain steady, which will be positive for Asian markets integrated into global supply chains.