Is the Asian interest rate cut wave coming? Market closely watching South Korea, Indonesia, Thailand

After the unexpected rate cut by the Central Bank of the Philippines, economists speculate on which Asian central bank will be the next to follow suit, with attention turning to central banks in South Korea, Indonesia, and Thailand.

Last Thursday, the Central Bank of the Philippines unexpectedly announced a 25 basis point rate cut, the first in nearly four years, ending a cumulative 450 basis point hiking cycle that began in 2022.

Robert Carnell, an economist at ING, stated in a report:

The Central Bank of the Philippines is one of the first central banks in the Asia-Pacific region to cut rates, which is a "brave" decision, especially coming before the US rate cut, showing even greater courage. The relatively calm market reaction to this decision indicates that other central banks in the Asia-Pacific region may now be considering taking action.

As high interest rates gradually have negative effects on the economy and the Fed is set to begin a rate-cutting cycle, the conditions for rate cuts by Asian central banks are maturing, with analysts expecting actions from the central banks of South Korea, Thailand, and Indonesia to follow suit.

Conditions for Rate Cuts are Gradually Maturing

Economists have long been watching for when Asia will truly begin to ease monetary policy. Patchy economic data and a global economic slowdown have cast a shadow over the region's economic outlook, with many central banks facing calls to boost growth, while signs indicate that high interest rates are starting to have negative effects.

However, with many Asian currencies performing poorly and uncertainty about when the US easing cycle will begin, the issue has become complex, making policymakers reluctant to act ahead of the Fed to avoid unfavorable interest rate differentials and currency depreciation risks.

Currently, as conditions gradually become more favorable and the prospect of Fed rate cuts becomes clearer, more Asian central banks may be on the edge of easing policies, but economists say countries will continue to proceed cautiously.

The market generally expects a 25 basis point rate cut by the Fed in September, which will boost confidence for Asian countries to start easing policies early. Signals from Fed Chairman Powell at this week's Jackson Hole central bank governors' meeting will also be closely watched, as any wavering in expectations of a Fed rate cut could have a chain reaction on Asian currency policies.

Who Will Take the Next Step?

Moody's economists Sarah Tan and Denise Cheok stated:

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

Juliana Lee, an economist at Deutsche Bank, also believes that the Bank of Korea may cut rates on Thursday:

Weak domestic demand and increasing bad loans have created conditions for a rate cut, and even if the Bank of Korea does not act as we expect, it will at least choose a dovish stance in October, hinting at a rate cut.

Moody's also believes that the Bank of Thailand is another candidate for rate cuts in 2024, which would help support the economy, which has been sluggish since the pandemic. The Bank of Thailand will hold a meeting on Wednesday:

The high interest rate environment in Thailand has weakened private consumption, inflation remains moderate, the Thai baht is recovering from depreciation, increasing the likelihood of a rate cut. Data released by Thailand on Monday for the second quarter showed a slight increase year-on-year, but a slowdown in quarter-on-quarter growth, indicating uneven economic growth Lavanya Venkateswaran, Senior Economist for ASEAN at Oversea-Chinese Banking Corporation, believes that the Indonesian central bank may follow the Philippines' lead and cut interest rates by 50 basis points by the end of the year. While she does not think the Indonesian central bank will act before the Federal Reserve, she stated that "taking a more dovish stance before or simultaneously with the Federal Reserve cannot be completely ruled out, especially if the exchange rate remains stable."

However, the market generally expects some divergence in the actions of ASEAN central banks, with forecasts indicating that the Indonesian and Philippine central banks will ease policies this year and in 2025, while Thailand and Malaysia will maintain their current stance