As high interest rates gradually have negative impacts on the economy and the Federal Reserve begins an interest rate cut cycle, conditions for central banks in Asian countries to cut interest rates are gradually maturing. Analysts expect that the central banks of South Korea, Thailand, and Indonesia will follow suit. The South Korean central bank may cut interest rates on Thursday of this week.
After the unexpected rate cut by the central bank of the Philippines, economists speculate on which Asian country's central bank will be the next to follow with a rate cut, with attention turning to South Korea, Indonesia, and Thailand, among others.
Last Thursday, the central bank of the Philippines unexpectedly announced a 25 basis point rate cut, the first time in nearly four years. This move marked the end of a 450 basis point hike cycle that began in 2022.
Economist Robert Carnell from ING Groep mentioned in a report:
The central bank of the Philippines was one of the first in the Asia-Pacific region to cut rates, a "brave" decision, especially given that it happened before the US rate cut, showing even greater courage. The relatively calm market reaction to this decision suggests that other central banks in the Asia-Pacific region may now be considering taking action.
As high interest rates gradually have a negative impact on the economy and the Fed is set to begin rate cuts, the conditions for rate cuts by Asian central banks are gradually maturing. Analysts expect central banks from South Korea, Thailand, and Indonesia to follow suit.
Conditions for rate cuts have gradually matured.
For a long time, economists have been watching when Asia will truly begin to ease monetary policy. Patchy economic data and a global economic slowdown have cast a shadow over the region's economic prospects, with many central banks facing calls to promote growth, while there are signs that high interest rates are starting to have a negative impact.
However, many asian currencies are performing poorly, and there is uncertainty about when the US easing cycle will begin, making the issue complicated and policy makers unwilling to act ahead of the Fed to avoid unfavorable interest rate differentials and currency depreciation risks.
With the conditions gradually becoming more favorable, the prospect of a Fed rate cut becomes more clear. More Asian central banks may be on the edge of easing policies, but economists say that countries will continue to be cautious.
The market generally expects a 25 basis point rate cut by the Fed in September, which will enhance the confidence of various Asian countries to start easing policies early. The signals from Fed Chairman Powell at this week's Jackson Hole central bank meeting will also be closely watched, and any wavering of Fed rate cut expectations could have a chain reaction on asian currency policies.
Who will take the next step?
Moody's economists Sarah Tan and Denise Cheok said:
We expect the Bank of Korea to follow suit, but concerns about household debt and rising housing prices may prevent the Bank of Korea from taking aggressive action.
Deutsche Bank economist Juliana Lee also believes that the Bank of Korea may cut rates on Thursday:
The conditions of weak domestic demand and increasing non-performing loans have created the conditions for a rate cut. Even if the Bank of Korea does not act according to our expectations, it will at least choose a dovish stance in October, implying a rate cut.
Moody's believes that the Bank of Thailand is another candidate for interest rate cuts in 2024, which will help support the economy, which has been weak since the epidemic. The Bank of Thailand will hold a meeting on Wednesday:
The high interest rate environment in Thailand has weakened private consumption, inflation remains moderate, and the recovery of the Thai baht depreciation has increased the possibility of interest rate cuts. Data released by Thailand on Monday showed a rebound in year-on-year growth, but a slowdown in quarter-on-quarter growth, and uneven economic growth.
OCBC Bank's senior economist for ASEAN, Lavanya Venkateswaran, believes that the Indonesian central bank may follow the footsteps of the Philippines and cut interest rates by 50 basis points at the end of the year. Although she does not believe that the Indonesian central bank will take action before the Federal Reserve, she cannot completely rule out the possibility of taking a more dovish stance before or in sync with the Federal Reserve, especially if the exchange rate remains stable.
However, it is widely expected that there will be some divergence in the actions of ASEAN central banks. It is expected that the Bank of Indonesia and the Central Bank of the Philippines will loosen policies this year and in 2025, while Thailand and Malaysia will remain unchanged.