For now, most Asia-Pacific central banks are reluctant to start cutting interest rates. This is largely because they look at the U.S. Federal Reserve and want to avoid triggering capital outflows and currency turmoil by lowering rates significantly ahead of the U.S. central bank.
That’s according to a report published by S&P Global Ratings today (Mar 26), titled, “Economic Outlook Asia-Pacific Q2 2024: APAC Bides Its Time On Monetary Policy Easing.”
“We would expect some Asia-Pacific central banks to start cutting rates in a few months even if the U.S. Fed delays its first cut further,” said S&P Global Ratings Asia-Pacific chief economist Louis Kuijs.
“High real policy rates choke demand and are therefore likely to strengthen the case for lowering. Real policy rates are now above 3% in Indonesia, the Philippines, and Thailand,” Kuijs said.
We forecast rate cuts of up to 75 basis points (bps) (India, Indonesia, New Zealand, and the Philippines) this year (which for India is the fiscal year), with the median reduction 50 bps. In line with our projection for U.S. policy rates, we largely expect these moves to occur in the second half of the year.
For the Asia-Pacific region, risks around the U.S. economy are two-way. Yet risks of sticky U.S. inflation are now outweighing those of a sharper economic slowdown there.
Higher U.S. interest rates exert greater capital outflow pressures in Asia, likely making central banks more cautious to ease policy. On the other hand, a sharp economic slowdown in the U.S. may test the region’s growth landscape.
In China, S&P Global Ratings sees GDP growth slowing to 4.6% in 2024 from 5.2% in 2023.
Key Takeaways
S&P Global Ratings sees China’s GDP growth slowing to 4.6% in 2024 from 5.2% in 2023. Our forecast factors in continued property weakness and modest macro policy support. Deflation remains a risk if consumption stays weak and the government responds by further stimulating manufacturing investment.
Among developed economies, S&P Global Ratings forecasts growth to pick up in trade-dependent ones such as South Korea, Taiwan, and Singapore; and fall in relatively domestic demand-led ones such as Japan and Australia. For Asian emerging market economies, we generally project robust growth, with India, Indonesia, the Philippines, and Vietnam in the lead.
The fall in inflation momentum has so far not been enough to convince Asia-Pacific central banks to start cutting rates. If rates continue to choke demand, the case for lowering will strengthen in coming months. We expect the Bank of Japan to modestly raise rates in the next four years.
The report does not constitute a rating action.
