Market Views: How Asian central banks can react to delayed Fed rate cuts

While Asian markets are influenced by the prolonged wait for interest rate cuts in the US, the central banks in the region are seen to have very different objectives in the coming six months.
Market Views: How Asian central banks can react to delayed Fed rate cuts

The US Federal Reserve (Fed) kept interest rates steady at the conclusion of its May meeting.

Federal Reserve Chair Jerome Powell said it was unlikely that the central bank’s next move will be a rate hike, as central bank policymakers kept rates steady holding at a range of 5.25% to 5.5%.

Although this stable stance was anticipated by the market, this move further “delays” the notion that rates will come down in 2024.

As this delay is causing ripple effects across the global economy, Asian central banks are also looking at how to assess this higher for longer rate scenario, bearing in mind how it will influence their respective economies and markets. 

As investors are navigating the Fed’s implications on markets, AsianInvestor asked asset managers and specialists to share their insights on the how Asian central banks could respond to ‘delayed’ US rate cuts over the coming six months, and why.

The following responses have been edited for clarity and brevity.

Edward Ng, senior portfolio manager
Nikko Asset Management

Edward Ng

Inflation in Asia has been broadly benign; leaving Asian central banks room to ease policy rates if needed. That said, growth in Asia has been mostly resilient, hence there is no urgency for them to rush to do so anytime soon.

In order not to widen their interest rate differentials with the US and risk further weakening their local currencies, we think that most Asian central banks will prefer to wait for the Fed to decidedly turn dovish and start easing maybe closer to year end; before embarking on their own monetary easing.

Particularly, current account deficit countries like Indonesia and the Philippines are more likely to wait for the Fed to ease first, given the sensitivity of their local currencies to external balance weaknesses.

All in all, we think that countries like Thailand, India, Korea, Indonesia and the Philippines have room to ease policy rates at least once within the next six months, but most will likely ease after the Fed’s move. On the other hand, we think Malaysia will keep rates unchanged for a relatively longer period given the potential rationalisation of fuel price.

Peiqian Liu, Asia economist
Fidelity International

Peiqian Liu

As market expects the Fed to hold its interest rate high for longer, we think Asian central banks will need to recalibrate their rate paths as well. The situation has been diverging across Asian central banks on a few factors, including FX stability, inflation, and growth dynamics.

Some Emerging Markets (EM) Asian economies have seen reacceleration of growth dynamics, supported by renewed uptick in global manufacturing cycle. Korea, Taiwan, and other export-oriented economies are benefitting from the favourable growth outlook.

The disinflationary trend remains relatively intact, as most central banks saw inflation easing back to or close to their respective inflation targets.

FX stability has been a concern for some economies in Asia, as Asian FX was relatively underperforming during the latest, renewed dollar strengthen driven by Fed repricing. Bank Indonesia hiked its interest rate and maintained a hawkish stance to stabilise the currency while some other economies stayed vigilant against excessive depreciation.

Overall, we think while some central banks may act according to their idiosyncratic drivers and dynamics, most EM Asian central banks will stay on the side-lines in the next few quarters, awaiting more clarity from the Fed before embarking on their respective easing cycles.

Christy Tan, investment strategist
Franklin Templeton Institute

Christy Tan

We expect Asian central banks to maintain a cautious policy stance in response to a “higher for longer” rate environment in the US. However, some central banks may still be well-positioned to ease monetary policy modestly without triggering capital outflows.

In South Korea, growth remains robust, supported by a recovering semiconductor cycle, allowing the Bank of Korea to implement modest easing in the second half of 2024 as inflation trends downward.

In China, the People's Bank of China has relied on quantitative tools, such as reserve ratio requirements cuts, to maintain loose liquidity, and further policy rate cuts are anticipated in the coming months.

Conversely, some Asian central banks may intensify currency support measures to mitigate the adverse effects of a stronger dollar, thereby preventing rising inflationary pressures. By balancing these strategies, Asian central banks aim to navigate the complexities of a delayed US rate cut scenario while safeguarding their economic stability.

Wai-Kiat Soh, investment manager of Asia fixed income

Many Asian central banks refer to the Fed in their statements, indicating close monitoring of its actions, hence any delays from the Fed could similarly push back rate cut expectations in the region.

It's worth noting that Asian central banks did not match the Fed's hiking cycle in lockstep previously, suggesting that their rate cuts might be more moderate this time. This justifies the cautious approach of waiting for the Fed's initial move.

Domestically, there's not much pressure to ease rates, as countries like the Philippines, Indonesia, and India maintain robust growth even as inflation is declining. However, elevated oil and rice prices pose potential risks.

While the Fed's decisions matter, domestic factors are significant too, especially for countries with strong external balances and high real rates, which may enable them to cut rates before the Fed. Nonetheless, most are likely to adopt a wait-and-see stance to avoid policy reversals later.

James Ashley, head of international strategic advisory solutions
Goldman Sachs Asset Management

James Ashley

Stubborn inflation in the US has caused a modest rethink in the Fed’s plans to take interest rates lower. While the FOMC had been indicating a cutting cycle to commence in mid-2024, a Q3 opening move now seems more likely.

However, although such a course of action would run counter to the aggressive market-priced cuts anticipated earlier this year, it would be only a minor correction to the Fed’s own forward guidance. Consequently, we think the modest deferment should not substantially alter the strategic asset allocation path for investors: this is a delay, not a derailment.

When the Fed does cut, we think that some of the biggest opportunities for investors may well come in EM rather than DM markets. Many EM central banks – including a large number of Asian monetary policymakers – have pushed real policy rates into highly restrictive territory out of concerns around currency depreciation.

In an environment in which the Fed begins to cut, many of those EM central banks will have the bandwidth to take rates lower, relatively rapidly. Such moves would provide support not only to investors in government bond markets, but also to holders of Asian credit and equities as financing costs ease and growth conditions improve.

Christiaan Tuntono, senior economist in Asia Pacific
Allianz Global Investors

Christiaan Tuntono

The Fed is prompting Asian peers to delay their own easing schedule and even having to hike to pre-empt currency depreciation pressure. Due to the openness of Asia on global trade and financial flows, the policies of many Asian central banks are to a varying degree “linked” to those of the Fed in the US.

Hong Kong is a prime example, as under the US and HK dollar peg the city has essentially set up its own monetary policy in lockstep with the Fed. The same applies to many other Asian economies though to lesser extent.

Japan, for example, saw its currency depreciated sharply against the US dollar as the Bank of Japan refuses to sharply raise its policy rate to narrow the much widened dollar-yen policy rate differential.

Even high-yielding Asian economies like Indonesia feels the pressure. Bank Indonesia was prompted to make a surprise 25bp hike on 24 April to widen the dollar-rupiah policy rate differential in order to pre-empt selling pressures on the rupiah.

With CPI inflation normalized back within target range, Indonesia’s real policy rate has risen substantially above 3%. Such high real interest rate level, in our view, is likely to weigh heavily on Indonesia’s domestic demand.

If US policy rate continues to stay “higher for longer,” we think Asian central banks will ultimately be forced to make a choice between currency stability and domestic demand in making their own policy rate decision.

David Chao, global market strategist, Asia Pacific (ex-Japan)

David Chao

Growth this year has generally improved for most Asian economies versus 2023, but it continues to be below trend in many places. Domestic demand remains tepid especially in EM Asia countries due to multi-year high interest rates, which has impacted investment and capex spending in the region. Policymakers have also been tightening their fiscal belts as they try to normalize their balance sheets after elevated pandemic spending. 

Asian central banks are likely to follow the US Fed policy path in a bid to defend their currencies, although with global growth seemingly re-accelerating and inflationary pressures easing, there is now some counterbalance to the urgency for rate cuts in Asia.

A stronger global trade cycle driven in party by robust AI product demand has asymmetrically benefitted some Asian exporters such as Taiwan, Japan, and South Korea. An uptick in commodity prices has benefited places like Malaysia and Indonesia. 

That said, the gnawing concern continues to be the stiff headwinds posed on Asian currencies from an ultra-strong US dollar, bolstered by high interest rates in the US and an uncertain rate cut timeframe. These worries should soon ebb when the Fed starts to cut rates, which should also lead to a fall in the US dollar.

I continue to expect two rate cuts from the Fed this year, but overall, I think domestic factors will wield more influence on Asia markets, as evidenced by the recent performance of Asia equities.

Aidan Shevlin, head of international liquidity fund management
JP Morgan Asset Management

Aidan Shevlin

Over the past three years, APAC central bank’s monetary policies have converged with Fed monetary policy - hiking base rates aggressively to fulfil their inflation targeting mandates and ensure investor confidence in local financial markets.

APAC central banks base rates generally peaked in mid-2023 at multi-decade highs. These higher base rates have raised the cost of funding and have a negative impact on interest rates sensitive sectors like housing and consumption – putting downward pressure on growth. Therefore, with regional inflation trending down, local central banks are eager to start cutting rates to avoid real rates becoming overly restrictive and potentially triggering an undesirable recession.

However, APAC central banks have been struggling to diverge from the Fed’s monetary policies – with three regional central banks hiking further in the past few months.  While lower rates would support domestic growth, they also risk reigniting inflation, magnifying currency weakness, increasing market volatility and triggering capital outflows.

While we believe APAC central bank base rates have probably peaked, sticky core inflation, and a higher for longer Fed suggest rates will remain elevated for the foreseeable future.

Dwyfor Evans, head of Asia Pacific macro strategy
State Street Global Markets

Dwyfor Evans

Fed monetary policy impacts Asia across four inter-related factors: capital flows, currencies, inflation pass-through and FX reserves accumulation.

As the Fed continues to push back on interest rate easing, Asian central banks will remain cautious to defend interest rate differentials and, with it, currency values – the recent Bank Indonesia interest rate hike shines a spotlight on regional sensitivity towards currency depreciation.

This implies very few opportunities across regional central banks for lower interest rates given currency weakness fears and any subsequent pass-through to higher inflation trends. Inertia from the Fed therefore implies comparable rate caution from regional central banks with little prospects for Asian central bank rate easing until Q4 24.

High US rates continue to support the US dollar and as it rises, FX reserves accumulation in Asia tends to slow and reverse as regional monetary authorities sell FX reserves to defend local currencies.

However, the propensity to defend currencies explicitly through reserves is lower than in previous cycles, with benchmark rates a primary factor to defend regional currencies. This is another factor that suggests Asian central banks will continue to shadow the Fed in their policy outlook.


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