A food stall at Gwangjang Market in Seoul is believed to be one of the areas where the Bank of Korea was the first to cut its benchmark interest rate.
François Rochon | Gamrafort | Getty Images
Economists at Nomura Securities predict that Asian central banks may start cutting interest rates earlier than the Fed.
Economists led by Sonal Varma wrote in a note on Friday that due to differences in macroeconomic conditions in Asia, the region’s major economies could turn dovish ahead of the U.S. central bank, or with a Fed-led global tightening cycle. “Decoupling”. notes.
“Our view that Asian central banks cut rates ahead of the Fed this cycle is based on fundamental divergences between the Asian and U.S. economies,” Nomura economists wrote.
Minutes from the Fed’s June meeting showed more rate hikes ahead, albeit at a slower pace. Instead, China has shifted to policy interest rate cuts as the country’s economic recovery from the coronavirus lockdown continues to be slow and investors focus on further stimulus measures to follow.
More than 32 percent of respondents said they expected the Bank of Korea to cut rates first after China, followed by Indonesia, the Philippines and then India, according to the real-time poll conducted by Nomura’s research team.
“After China, South Korea, India and even Indonesia are likely to cut rates ahead of the Fed as deflation picks up, demand weakens and real rates rise,” the economists wrote.
Faster deflation a concern
Economists at Nomura pointed to a slump in commodity-led manufacturing hurting growth and deflation in the region as the main reason they expect Asian central banks to cut rates ahead of the U.S. Federal Reserve.
“In our view, the region is now also entering a period of likely moderation in domestic demand, reflecting the lagged effects of monetary policy normalization,” they wrote.
“We believe that as domestic demand cools and core inflation continues to decline, we will need to adjust rates to a less restrictive environment,” Nomura economists said.
Unlike in the US, tightness in the labor market is “not a concern in Asia (except Singapore)”, they added.
“As a result, core inflation is less sticky,” they wrote, adding that inflation in Asia was driven more by supply than demand.
“Deflation has progressed much faster in the region, especially in emerging Asia, where food and energy are heavily weighted in the CPI basket and inflation spikes are more supply-side driven,” the economists wrote. of.”
Seoul may start cutting spending
Nomura expects the Bank of Korea to be one of the first central banks to cut rates after China. Economists expect a 25 basis point cut in the benchmark rate in October and another 25 basis point cut by the end of the year.
“While the BOK appears to remain sensitive to the Fed’s policy stance, it is placing greater emphasis on domestic factors (growth),” the economists wrote.
They noted that central bank Governor Changyong Rhee dismissed investor concerns over South Korea’s currency weakness. Lee told CNBC in May that it was “too early” to talk about a rate cut.
“Governor Lee Myung-bak made it clear that interest rate differentials are not a key driver of won weakness and dismissed the risk of a financial event due to currency weakness,” Nomura economists wrote.
this won The U.S. dollar traded at $1,298.57 on Tuesday morning, as investors looked ahead to the central bank’s monetary policy decision due later this week.
india has history
Economists at Nomura also noted that India’s domestically driven economy could support a monetary policy trajectory independent of the Fed.
“(RBI’s) policy is largely driven by domestic factors, and if they need to ease policy (due to lower growth and inflation), then the RBI can get ahead of the Fed,” the economists wrote.
Nomura expects the Reserve Bank of India to also start cutting rates in October, expecting a total rate cut of 75 basis points.
“Our judgment is that as India’s growth starts to disappoint, the RBI’s flexible inflation targeting regime will imply a greater emphasis on growth, as long as underlying inflation is close to 4.5%, which has been the case,” they wrote.
The firm noted that India had previously decoupled from the Fed cycle. The Reserve Bank of India began cutting rates in February 2019, a few months after the Federal Reserve cut rates for the first time in decades.
“This runs counter to the widely held view that monetary policy in high-yield/current-account-deficit countries is aligned with the Fed on foreign exchange issues,” the economists wrote.