Asian central banks rely on gradual interest rate cuts

Expectations are that most Asian central banks will lower their interest rates more slowly next year than the U.S. Federal Reserve. This is highlighted by Reuters surveys. The robust economic growth in Asia has reduced the pressure to maintain exchange rate stability against a persistently strong U.S. dollar. A significant rate cut by the Fed in September and the prospect of further reductions by the end of the year provide Asian central banks with the leeway to assess their next steps. While the Fed is expected to reduce rates by 125 basis points next year, a more gradual approach is anticipated from Asian central banks. Nonetheless, the risk remains that the Fed may move more slowly than currently anticipated. Since inflation in Asia is within target ranges and growth is stable, there is no urgent need for most Asian central banks to significantly lower rates. However, the concern over weak currencies has prevented policymakers from hastily cutting rates to avoid further interest rate differentials. The Indian rupee is actively stabilized by the Reserve Bank of India, yet most Asian currencies have recorded losses of between 2% and 6% against the dollar this year. According to surveys, seven out of eight major Asian central banks, which only moderately raised rates after the pandemic, plan to maintain their rates or reduce them by no more than 25 basis points in 2024. An exception is Bank Indonesia, which is considering further rate cuts of 50 basis points by the end of the year. The People's Bank of China stands out with its most aggressive monetary easing measures since the pandemic, having also adjusted the key benchmark interest rate in an effort to promote economic recovery. A central risk for global interest rates could be if they decrease further than currently expected. If the Fed takes a cautious approach, this could result in a stronger dollar.