Central banks across emerging Asia are poised to implement interest rate cuts in the coming months, driven by declining inflation and tepid domestic demand, Capital Economics said in a note on March 28.

“The one remaining concern for policymakers is the fear of further falls in their currencies. But this worry should soon start to dissipate if, as we anticipate, rate cuts by the US Federal Reserve lead to a weakening in the US dollar. We expect central banks across Asia to start cutting interest rates from June, sooner than the consensus and financial markets currently expect,” Capital Economics analysts said.

China, exhibiting a resilient economic performance, is likely to continue benefiting from policy interventions aimed at bolstering growth. Similarly, Hong Kong's economy is set to capitalise on a cyclical upturn in mainland China and global monetary easing. However, the medium-term economic forecast for both regions remains cautiously optimistic.

In South Korea, a resurgence in the construction sector is projected to stimulate GDP growth, although high-interest rates may continue to dampen private consumption.

Singapore anticipates a policy easing by the Monetary Authority in October, in light of subsiding inflation and a forecast economic slowdown.

Taiwan emerges as the regional frontrunner, propelled by robust global demand for AI-related products, with an anticipated economic expansion of 5.5% this year – nearly twice the average growth rate of the past decade.

India sustains its position as the world's fastest-growing major economy into 2023, with expectations of continued robust growth.

Sri Lanka is set to witness economic upliftment, supported by interest rate cuts and a rebound in tourism.

Conversely, Pakistan is expected to maintain elevated interest rates through 2024 due to inflationary pressures and a precarious external financial stance.

Bank Indonesia is anticipated to reduce interest rates in June, encouraged by controlled inflation and the resilience of the rupiah amidst growing economic challenges.

Malaysia's central bank, cautious of inflation, is likely to maintain the status quo on interest rates throughout 2024.

The Philippines, however, is poised for substantial rate cuts totalling 175 basis points this year, in response to slowing growth and manageable inflation.

Thailand, grappling with negative inflation and economic hurdles, is expected to see rate reductions by the Bank of Thailand later in the year.

Vietnam continues to thrive as a beneficiary of the deteriorating trade relations between the US and China, with potential further gains if the US electoral outcome leads to increased tariffs on Chinese imports.

“Many countries last year grew at their weakest pace (outside the pandemic) since the Global Financial Crisis. This year should be better, but growth in many places will still come in below trend,” Capital Economics said.

As emerging Asia grapples with the aftermath of the pandemic, the regional economic landscape is marked by a confluence of tightening monetary policy, cautious fiscal measures and fluctuating export demand, setting a complex stage for recovery and growth.

The stringent monetary policy, with interest rates at multi-year highs in several nations, has precipitated a notable decline in consumer expenditure and investment, exerting pressure on domestic demand across the region. The repercussions of high interest rates are palpable, dampening the vitality of economic activities and stymieing the potential for robust growth.

Compounding the challenges, governments across the region are pivoting towards fiscal consolidation in an effort to stabilise public finances, following a surge in government debt during the pandemic. This shift towards reducing fiscal stimulus is poised to further constrain economic activity, casting a shadow over the nascent recovery.

Export sectors, however, have shown signs of buoyancy in recent quarters, bolstered by a revival in global demand. Nonetheless, this momentum faces potential headwinds, with projections indicating a looming slowdown. Advanced economies' tepid growth trajectories are likely to impede export volumes, while subdued commodity prices could particularly impact Malaysia and Indonesia, the region's primary commodity exporters.

In stark contrast, Taiwan, and to a lesser extent Korea, are poised to witness robust export growth, driven by surging demand for AI-related hardware, underscoring the divergent paths within the region's export landscape.

Inflation trends offer a silver lining, with headline inflation receding across most countries, aligning with targeted benchmarks. This decline is attributed to diminishing food and fuel price inflation, alongside a moderation in core inflation, reflecting easing price pressures amidst subdued demand.

However, specific factors such as planned tax adjustments in Malaysia and base effects in Vietnam are anticipated to temporarily elevate inflation levels in these economies. Yet the broader regional outlook anticipates a continued downtrend in inflation, supported by potential declines in global rice prices and stable oil price forecasts, mitigating fuel price inflation in the near term.

This evolving inflationary landscape, coupled with the challenges of weak domestic demand, sets the stage for central banks to consider interest rate reductions. The anticipation of such monetary easing is contingent on the alleviation of currency depreciation concerns, which may diminish with expected rate cuts by the US Federal Reserve, potentially weakening the US dollar.

As Asia navigates through these intricate economic dynamics, the balance between supporting growth and ensuring financial stability remains paramount, with monetary and fiscal policies playing pivotal roles in shaping the region's economic trajectory.

 

Table 1: GDP & Consumer Prices (%, y/y)
		GDP					Consumer Prices
	Share of World 1	2022	2023	2024f	2025f	2026f	2022	2023	2024f	2025f	2026f
China
Mainland China 2	18.6	-3.7	8.8	4.5	3.5	3	2.5	0.2	0.5	0.5	0.5
Hong Kong	0.3	-3.7	3.2	3	3	1.5	1.9	2.1	2	1	1
NIEs
South Korea	1.7	2.6	1.4	2	2	1.5	5.1	3.6	2.3	1.8	1.8
Singapore	0.4	3.6	1	2.5	2.5	3	6.1	4.8	2	1.5	1.5
Taiwan	1	2.4	1.4	5.5	3	3	2.9	2.5	2	2	2
South Asia
Bangladesh	0.8	7.1	5.5	6.5	7	6.5	7.7	8.6	6.5	5.6	6
India	7	6.5	7.7	7	6.5	6.8	6.7	5.7	4.7	4.5	4.5
Pakistan	0.9	6.1	-0.2	2.5	4.8	5.1	19.9	30.9	17.5	9.9	7.8
Sri Lanka	0.2	-7.3	-1.9	4	5	5	45.2	19.8	6	4.1	4.9
South East Asia
Brunei	0.02	-1.6	-0.8	3.5	3	3	3.7	1.5	1.5	1	1
Cambodia	0.05	5.2	5.5	6	6.5	6.5	5.3	2.9	3	3	3
Indonesia	2.4	5.3	5	5	5	5	4.2	3.6	2.7	2.9	2.8
Laos	0.04	2.5	4	4	4.5	4.1	23	28	10	3	3
Malaysia	0.7	8.7	3.7	3	5	5	3.4	2.5	3	2.5	2
Philippines	0.7	7.6	5.6	5.5	6.5	6.5	5.8	6	3	3.5	3.5
Thailand	0.9	2.5	1.9	3	3.5	2.5	6.1	1.3	0.1	1.8	1.6
Vietnam	0.8	8	4.7	6	7	6.5	3.2	3.3	3.9	3.5	1.6
Emerging Asia	36.7	0.7	6.9	4.9	4.3	4.1	4.6	3.5	3.1	2	2
Sources: Refinitiv, Capital Economics. 1) % of GDP, PPP terms (IMF estimates). 2) Based on our China Activity Proxy

 

Table 2: Budget & Current Account Balance (% of GDP)
	Budget Balance					Current Account
	2022	2023	2024f	2025f	2026f	2022	2023	2024f	2025f	2026f
China
Mainland China	-4.7	-4.6	-5	-4.2	-3.8	2	2.5	1	0.5	0.5
Hong Kong	-4.3	-5.1	--1.7	-0.5	-0.2	11	6	4	2	3
NIEs
South Korea	-1.6	-1.2	-1	-1	-0.5	1.4	2	2.5	2.5	3
Singapore	0.8	3.2	2	2.5	3	18	19	21	19	19
Taiwan	-1.7	-0.7	-0.5	-0.3	-0.5	13.2	12	15	14	13
South Asia
India	-9.2	-8.8	-8.4	-8	-7.6	-2.4	-0.9	-1.5	-1.8	-1.8
Pakistan	-7.8	-8.1	-6.5	-5.5	-4	-4.6	-0.7	-1	-1	0
Sri Lanka	-11.6	-10.4	-7.9	-5	-4	-3.8	-1.9	-1.6	-1	-1
South East Asia
Indonesia	-2.3	-2.2	-2.5	-2	-2	1	-0.1	0.5	1	1
Malaysia	-5.6	-4.7	-4	-3.5	-3.5	3.1	1.3	2.5	2.5	2.5
Philippines	-5.5	-4.8	-3	-2.5	-2.5	-4.5	-3.5	-2.5	-2	-2
Thailand	-4.6	-2.9	-4	-3	-2.5	-3.2	0.8	3	4	5
Vietnam	0.3	-1.3	-2	-1.5	-1.5	-0.3	5.1	4	4	3.5
Sources: Refinitiv, Capital Economics.

 

Table 3: Financial Market Forecasts
			Currency Forecasts					Stock Market Forecasts
			Latest	End-2024	End-2025	End-2026	Latest	End-2024	End-2025	End-2026
China
Mainland			7.23	7	6.8	6.8	3,526	3,930	4,360	4,100
Hong Kong			7.82	7.8	7.8	7.8	16,392	18,300	20,300	19,100
NIEs
South Korea			1,350	1,300	1,250	1,250	2,755	2,810	3,180	2,910
Singapore			1.35	1.3	1.27	1.26	3,252	3,300	3,550	3,400
Taiwan			32	30	29	28.5	20,200	21,400	24,200	21,900
South Asia
India			83.38	80	78	78	73,043	76,500	82,500	78,000
Pakistan			278	275	250	265	66,588	67,000	70,000	69,000
Sri Lanka			301	320	320	330	11,439	11,550	12,500	13,000
South East Asia
Indonesia			15,850	15,250	15,000	15,000	7,310	7,800	8,400	7,900
Malaysia			4.73	4.5	4.3	4.3	1,531	1,550	1,640	1,580
Philippines			56.3	55	54	54	6,904	7,100	7,650	7,150
Thailand			36.4	34	32	32	1,382	1,410	1,480	1,420
Vietnam			24,785	23,500	23,000	23,000	1,283	1,350	1,450	1,350
Sources: Bloomberg, Capital Economics

 

Table 4: Central Bank Policy Rates
					Forecasts
	Policy Rate	Latest	Last Change	Next Change	End-2024	End-2025	End-2026
China	7d PBOC Rev Repo	1.8	Down 10bp (Aug. ’23)	Down 10bp in Q2 ‘24	1.6	1.6	1.6
NIEs
South Korea	Base Rate	3.5	Up 25bp (Jan. ‘23)	Down 25bp Q2 ‘24	2.75	2.25	2.25
Taiwan	Discount Rate	2	Up 12.5bp (Mar. ‘24)	No Change	2	2	2
South Asia
India	Repo Rate	6.5	Up 25bp (Feb. ’23)	Down 25bp Q3 ‘24	5.75	5.5	5.5
Pakistan	Discount Rate	22	Up 100bp (June ‘23)	Down 100bp Q2 ‘24	18	10	8
Sri Lanka	Deposit Rate	8.5	Down 50bp (March‘24)	Down 50bp Q2 ’24	6.5	6	6
South East Asia
Indonesia	7-day Repo Rate	6	Up 25bp (Oct. ‘23)	Down 25bp Q2 ‘24	5.25	4.75	4.75
Malaysia	Overnight Rate	3	Up 25bp (May ‘23)	No Change	3	3	3
Philippines	Overnight Rate	7	Up 25bp (Oct. ‘23)	Down 25bp Q2 ‘24	4.75	4.25	4
Thailand	Repo Rate	2.5	Up 25bp (Sep. ‘23)	Down 25bp Q2 ‘24	2	2	2
Vietnam	Refinancing Rate	4.5	Down 50bp (June ‘23)	Down 25bp Q3 ‘24	4	4	4
Sources: Bloomberg, Capital Economics

 

Table 5: 10-Year Local Currency Government Bond Yields (%)
	Latest	End-2024	End-2025	End-2026
China	2.3	2.3	2.2	2.2
NIEs
South Korea	3.39	3.25	3	3.25
Taiwan	1.44	1.25	1	1.25
South Asia
India	7.08	6.75	6.75	6.5
South East Asia
Indonesia	6.66	6.5	6.25	6.5
Malaysia	3.88	3.5	3.5	3.75
Philippines	5.95	5.75	5.75	6
Thailand	2.55	2.5	2.5	2.75
Sources: Bloomberg, Capital Economics