Fed Rate Cut Expected to Trigger Policy Easing Across Asia

After more than two years of currency pressures, Asia's central banks are set to receive some relief as the US Federal Reserve (Fed) is poised to cut interest rates by a quarter point on Wednesday. However, the path ahead for the region's monetary policy remains uncertain and potentially challenging.

Lower rates in the US provide room for officials in Jakarta, Seoul, Mumbai, and other capitals to consider easing their own rates. The anticipation of the Fed's rate cut has already attracted investors to emerging Asian debt and equities, boosting currencies across the region.

Uncertain Path Ahead for Asia's Central Banks

The critical question now is how much these central banks need to cut in the coming months, or whether they need to cut at all. Countries like India and the Philippines face inflationary risks, while South Korea might prioritize financial stability.

“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, a senior regional economist at Barclays plc. “It’s not obvious that the economy is just crying out for policy easing and that policymakers need to shift as soon as possible.”

Upcoming Central Bank Decisions

This week, central banks in China, Taiwan, and Japan are expected to maintain their rates, though there is some chance of a rate cut in Indonesia. The Reserve Bank of Australia is also expected to keep rates steady at its meeting on Sept 24.

A series of decisions will follow in mid-October, with central banks from India to the Philippines issuing potentially divergent policies. Markets and economists remain divided on what to expect.

Swap markets are pricing in a 50 basis point reduction for the Reserve Bank of New Zealand on Oct 9, with some expectations of easing for the Reserve Bank of India on the same day. New Zealand is likely to continue cutting rates through the rest of 2024 as it nears a third recession in two years, while inflationary pressures in India and the Philippines are expected to keep policymakers cautious, with forecasts pointing to only one 25 basis point cut in the fourth quarter.

In South Korea, a similar approach is expected, with economists predicting only one rate cut in the final three months of the year, as officials remain vigilant over financial imbalances linked to home prices and household loans. The Bank of Thailand may hold out the longest, with expectations that it will resist government calls to cut rates until next year at the earliest.

Focus on Domestic Factors

“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 could change the current outlook: a US recession, which could strengthen the US dollar in a flight to safety, or a November presidential election outcome in the US that leads to protectionist policies, which could negatively impact trade-reliant countries in Asia.

However, neither of these scenarios is the base case for economists, and neither is likely to stop the flow of funds into Asian assets in the near term.

If Fed Chair Jerome Powell and his colleagues cut interest rates and signal additional cuts, 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 added.