Economists at Nomura have predicted that central banks in Asia may begin cutting interest rates before the Federal Reserve, citing divergent macroeconomic conditions in the region. They suggest a potential “decoupling” from the global tightening cycle led by the Fed, as major economies in Asia exhibit different trends. The economists highlight the downturn in goods-led manufacturing and disinflation as key reasons for expecting rate cuts by Asian central banks ahead of the Fed.
While the Federal Reserve’s June meeting minutes indicated the possibility of future rate hikes, China has already turned to policy rate cuts to stimulate its economy amid ongoing struggles caused by the Covid-19 pandemic. According to a real-time survey conducted by Nomura, over 32% of respondents expect South Korea’s central bank to be the first to cut rates after China, followed by Indonesia, the Philippines, and India.
The economists point to faster disinflation, weak demand, and higher real rates as factors that may lead to rate cuts by Asian central banks. They argue that as domestic demand cools and core inflation remains low, adjusting rates to less restrictive settings will be necessary. Unlike the United States, the tighter conditions in the labour market are not a major concern for Asia, apart from Singapore. Inflation in Asia has been driven more by supply-side factors than demand.
Nomura expects the Bank of Korea to be one of the first central banks to cut rates following China. They anticipate a 25-basis-point cut in October and an additional 25-basis-point cut by year-end. The economists also suggest that the Reserve Bank of India, which operates based on domestic factors, may start cutting rates in October, with a predicted total cut of 75 basis points.
The economists note that India has a history of decoupling from the Fed’s cycle. The Reserve Bank of India initiated rate cuts in February 2019, months ahead of the Federal Reserve’s first rate cut in decades. This divergence challenges the widely held belief that monetary policy in countries with high yields and current account deficits aligns with the Fed due to foreign exchange concerns.
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