news

After the Philippine central bank unexpectedly cut interest rates, economists speculated who would be the next Asian central bank to follow suit, with markets turning their attention to central banks such as South Korea, Indonesia and Thailand.

Last Thursday, the Philippine central bank unexpectedly announced a 25 basis point interest rate cut, the first in nearly four years. This move ended the cycle of cumulative 450 basis points of interest rate hikes that began in 2022.

ING economist Robert Carnell said in a note:

The Philippine central bank is one of the first central banks in the Asia-Pacific region to cut interest rates, which is a "brave" decision, especially since it came before the United States cut interest rates, demonstrating greater courage.The relatively muted market reaction to the decision suggests other central banks in the Asia-Pacific region may now consider taking action.

As high interest rates gradually have a negative impact on the economy and the Federal Reserve is about to start a cycle of interest rate cuts, the conditions for Asian central banks to cut interest rates are gradually maturing, and analysts expect the central banks of South Korea, Thailand and Indonesia to follow suit.

The conditions for interest rate cuts are gradually ripe

Economists have long been watching to see when monetary easing in Asia will actually begin. Mixed economic data and a global slowdown have clouded the region’s economic outlook, with many central banks facing calls to boost growth amid signs that high interest rates are starting to take a toll.

However, the issue is complicated by the underperformance of many Asian currencies and uncertainty about when the U.S. easing cycle will begin, making policymakers reluctant to act ahead of the Fed and risk adverse interest rate differentials and currency depreciation.

As conditions gradually become more favorable and the prospect of a Federal Reserve rate cut becomes clearer, more Asian central banks may be on the verge of easing policy, but economists say countries will remain cautious.

The market generally expects the Fed to cut interest rates by 25 basis points in September, which will boost the confidence of Asian countries to start easing policies as soon as possible. The signals from Fed Chairman Powell at this week's Jackson Hole central bank governors meeting will also be watched closely.Any shake-up in expectations of a Fed rate cut could have knock-on effects on monetary policy in Asia.

Who will take the next step?

Moody'sEconomists Sarah Tan and Denise Cheok said:

We expect the Bank of Korea to follow suit, but concerns about rising household debt and house prices may prevent the Bank of Korea from taking aggressive action.

Deutsche BankEconomist Juliana Lee also believes that the Bank of Korea may cut interest rates on Thursday:

Weak domestic demand and rising nonperforming loans create conditions for rate cuts, and even if the Bank of Korea does not act as we expect, it will at least choose a dovish stance in October, suggesting a rate cut.

Moody's also sees the Bank of Thailand as another candidate for a rate cut in 2024.That has helped support an economy that has been sluggish since the pandemic, with the Bank of Thailand set to meet on Wednesday:

Thailand's high interest rate environment has weakened private consumption, inflation has remained mild, and the baht has recovered from its depreciation, increasing the possibility of a rate cut. Thailand's second-quarter data released on Monday showed that year-on-year growth has rebounded, but the month-on-month growth rate has slowed down, and economic growth is uneven.

Lavanya Venkateswaran, senior economist for ASEAN at OCBC Bank, said:Indonesia's central bank may follow the Philippines' lead and cut interest rates by 50 basis points by the end of the year.While she doesn’t think Bank Indonesia will act before the Fed, “a more dovish stance before or in sync with the Fed cannot be completely ruled out, especially if the exchange rate remains stable.”

However, markets generally expect some divergence in the actions of ASEAN central banks, with Bank Indonesia and the Philippines expected to ease policy this year and in 2025, while Thailand and Malaysia remain unchanged.