Most Asian central banks have eased rates slowly in recent quarters to boost domestic growth. But with the US Federal Reserve (Fed) holding steady and the yield gap widening, concerns over currency stability have limited aggressive rate cuts despite the tepid domestic growth dynamics.
Yesterday, the Fed lowered policy rates by 25 basis points as it shifted its focus from the stickiness of inflation to signs of weakness in the labour market. Although the path to further cuts remains uncertain and data dependent, the easing and further expectations of more to come may have eased some concerns on US yield differentials and prompt further easing in some Asian countries, particularly the economies facing greater domestic headwinds. The overall policy stance across the region will likely become more accommodative but differences will persist due to varying economic conditions, such as domestic inflation trends, the degree of payback from exports frontloading ahead of tariffs and the exposure to the evolving growth dynamics in major economies particularly the US and China.
Today, the People's Bank of China (PBoC) maintained its benchmark 7-day reverse repo rate at 1.4% during its daily open market operations. China’s domestic recovery remains uneven and we anticipate that the resumption of Fed easing could provide more room for the PBoC to manoeuvre as it addresses multiple mandates including supporting growth, restoring inflation and maintaining currency stability.
The Bank of Japan (BOJ) is set to hold its policy meeting on 19th September. While the market does not expect the BOJ to change its policy settings in this meeting, there are expectations for further hikes as inflation in Japan remains above target. India’s recovery may lean more on domestic growth due to weaker external demand and higher US tariffs. However, with the Consumer Price Index near the lower end of the Reserve Bank of India (RBI)’s 2-6% target, there is ample room for policy easing to cushion growth headwinds if needed. Following the Fed easing, the RBI can further ease without much concern on yield differentials and its associated impact on foreign exchange.
For the rest of Asia, the Fed easing and a potentially weaker dollar may offer central banks additional flexibility in managing both foreign exchange stability and domestic policy support. Economies with inflation well below target, such as Thailand and Indonesia, have more space for policy adjustments. Bank Indonesia this week lowered its policy rate by 25 basis points ahead of the Federal Open Market Committee decision as it turned more dovish to focus more on growth support going forward. In countries where inflation is approaching target levels, like Australia and Korea, some policy easing may still occur, though these economies could be nearing their neutral rates in the coming quarters. For countries experiencing an upturn in artificial intelligence-related demand, such as Taiwan and Malaysia, there might be less reason to be more dovish for now.
