Analysis: Asia central banks in focus as stage set for more rate cuts

Bangko Sentral ng Pilipinas surprised many when it broke a nearly four-year streak and lowered its main policy rate last Thursday. The move started unwinding 450 basis points of hikes made through 2022 and 2023 as the Philippines bank battled to rein in inflation, like many of its peers.

For economists at ING, opting to make just about one of the first regular rate cuts in Asia-Pacific was a “brave" call. That it precedes U.S. policy easing makes it all the more gutsy, Robert Carnell, regional head of research for Asia-Pacific at ING, said in a note.

“The relative calm with which this decision was received by markets suggests that other APAC central banks may now be more likely to consider a move," he wrote.

The Philippines cut came a day after the Reserve Bank of New Zealand brought its official cash rate down by 25 basis points. That put both of them in step with the People’s Bank of China, which had already delivered a flurry of cuts to boost a sluggish economy.

Economists have long been watching to see when easing would truly start in Asia. Patchy economic data signaling uneven domestic progress and a global slowdown muddied the regional outlook, as many banks faced calls to boost growth amid signs that high rates were starting to take a toll.

A poor performance by many Asian currencies and uncertainty about when the U.S. easing cycle will start complicated matters, making policymakers reluctant to move ahead of the Fed and risk unfavorable rate differentials and depreciation.

As conditions turn tentatively more favorable and Fed cuts are more firmly priced in, more Asian banks could be on the cusp of easing, but economists say caution will persist.

“We expect the Bank of Korea to be close on the line-up," said Sarah Tan and Denise Cheok, economists at Moody’s Analytics. “But worries over climbing household debt and house prices will deter the BOK from moving aggressively."

Deutsche Bank economists think the BOK could opt for a rate cut on Thursday, as weak domestic demand and rising nonperforming loans set the stage for monetary policy easing.

“Even if the BOK goes against our call, we see it opting for a dovish hold, suggesting a rate cut in October, at the very least," Deutsche Bank economist Juliana Lee said.

The Bank of Thailand is another likely candidate for rate cuts in 2024, which could help shore up an economy growing below its potential rate since the pandemic, Moody’s Analytics’ Tan and Cheok said. Thailand’s relatively high-rate environment has sapped private consumption, and consumer prices remain tepid, which, together with a gradually recovering baht, raises the probability of a cut, they said.

Thailand’s second-quarter data on Monday showed a pickup in growth in on-year terms but a slowdown on a sequential basis, with uneven momentum across the economy.

Moody’s Analytics penciled in a 25-basis-point Fed cut in September that it thinks would give central banks in Asia more confidence to start easing sooner rather than later.

Following the Fed will help maintain interest-rate spreads, reducing the risk of weakening currencies and helping economies like South Korea and Thailand, “where tepid domestic demand has been a concern," it said.

For OCBC senior Asean economist Lavanya Venkateswaran, it is Bank Indonesia that will likely follow in BSP’s footsteps, with 50 basis points of cuts in the final quarter of the year.

While she doesn’t think the Indonesian bank, which meets on Wednesday, will make a move ahead of the Fed given the priority it places on rupiah stability, “a more dovish turn ahead of or in sync with the U.S…cannot be ruled out, particularly if FX stability is maintained."

OCBC expects some divergence in Asean central bank action, forecasting easing from BI and BSP this year and in 2025 but holds from Thailand and Malaysia. The BOT meets on Wednesday.

The curtains are certainly up on rate cuts in Asia, but Barclays economists expect this week’s decisions to maintain the status quo.

“We urge patience—we do not expect other central banks to follow suit [after BSP] immediately," Barclays economists including Brian Tan and Shreya Sodhani said in a note.

At BI’s meeting on Wednesday, for example, there is some chance of a cut, but Barclays thinks policymakers will want more confidence that Fed easing is at hand.

BI is likely to be wary about cutting too early, “lest the higher-for-longer narrative unexpectedly and suddenly returns," they said.

What Fed Chair Jerome Powell signals at the Jackson Hole gathering of central bankers will also be in focus this week. Any wavering in expectations for Fed cuts could have knock-on effects for Asia policy views.

While Powell is unlikely to speak directly on the pace of rate cuts, he will likely point to recent U.S. economic data to show that the Fed can be a bit patient before making a move, but also signal a willingness to cut if labor markets deteriorate, Nomura research analysts said in a note.

Write to Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com and Kimberley Kao at kimberley.kao@wsj.com