Aug 20 / Victor Arduin

Asian central banks are starting to ease interest rates

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Asian central banks are starting to ease interest rates

  • A potential interest rate cut by the US Federal Reserve in September could have major global effects. It may lead to a gradual depreciation of the US dollar, boosting demand for dollar-denominated commodities.
  • Additionally, this could encourage central banks globally to implement more dovish monetary policies, especially in Asian countries that have not yet started their easing cycles.
  • Last week, the Bangko Sentral ng Pilipinas (BSP) made a bold move by cutting its policy rate by 25 basis points to 6.25%. Anticipating potential Federal Reserve rate cuts, the BSP has started easing its monetary policy.
  • Indonesia's central bank, Bank Indonesia (BI), will decide its policy rate this week. Despite fiscal concerns and potential pressure on the rupiah, speculation is rising that BI may lower rates to boost economic growth.

Introduction

Central banks in Asia have been in the macroeconomic spotlight over the past few weeks. China, which has already lowered interest rates this year, continues to expand its monetary stimulus to support its economy. Meanwhile, India is adopting a more cautious approach as food price pressures continue to weigh on inflation.

However, last week's interest rate cut by the Philippine central bank surprised many observers. While aimed at stimulating the domestic economy, the decision caught some analysts off guard. The relative calm in the markets, evidenced by the stability of the Philippine peso (PHP), might encourage other Asian central banks to follow suit. Indonesia's central bank is set to announce its policy rate decision this week, with expectations for a potential inaugural rate cut.

Our analysis today will focus on the Asian monetary landscape and its implications for upcoming interest rate policy decisions.

Image 1: US – Treasury Yields (%)

Source: Refinitiv

Image 2: FX Spot Rate - US Dollar/Philippine Peso

Source: Refinitiv

One of the first central banks in Asia to cut interest rates

A potential interest rate cut by the US Federal Reserve (Fed) in September is expected to have a significant impact on the global economy. Directly, this could trigger a gradual depreciation of the US dollar, potentially boosting demand for commodities primarily traded in the American currency. Moreover, it may embolden central banks worldwide to initiate or accelerate their own monetary easing policies.

Last week, in a bold move, the Bangko Sentral ng Pilipinas (BSP) reduced its policy rate by 25 basis points to 6.25%. In anticipation of possible rate cuts by the US Federal Reserve, the BSP has started to ease its monetary policy. While some central banks have adopted a more cautious wait-and-see approach, the Philippines has taken a proactive stance in shifting to a more dovish monetary environment to support its economy.

Recent cuts in rice tariff have likely bolstered monetary authorities' confidence that inflation will gradually converge to the target range of 2-4%. Also, the market, has reacted relatively calmly to the decision, with the Philippine peso appreciating by nearly 3% since the beginning of the month.

Image 3: Philippine – Inflation & Interest Rates (%)

Source: Refinitiv

On August 21st, Indonesia decides its policy rate

Recently, the country approved a 3.6 quadrillion rupiah (US$230 billion) budget for the coming year. Combined with a less restrictive monetary policy, this could stimulate consumer spending. The Jakarta Stock Exchange Composite Index has already captured gains in this more dovish environment, hovering near its all-time high.

Following the recent rate cut by the Bangko Sentral ng Pilipinas (BSP), Indonesia's central bank, Bank Indonesia (BI), is set to make its policy rate decision this week. Despite lingering fiscal concerns and potential pressure on the rupiah, there is growing speculation that the monetary authority may opt for a rate reduction to stimulate economic growth.

If Bank Indonesia confirms this measure, we can expect an increasingly favorable economic environment for expansion in Asia, which, in turn, should boost demand for commodities. This trend may be partly attributed to the adoption of more expansionary monetary policies by other central banks in the region, as well as the potential for a sharper depreciation of the US dollar, which would make dollar-denominated commodities more attractive to holders of other currencies.

Image 4: Indonesia – Inflation & Interest Rates (%)

Summary

The market is alredy pricing a Fed rate cut in September. As US Treasury yields decline, more central banks will find room to lower their interest rates without causing inflationary pressures or significant currency depreciation.

The most recent example was the central bank of the Philippines, which, despite some concerns about inflation, decided to cut rates last week. In this context, a similar move might happen this week with Indonesia, which also has high interest rates.

A less restrictive monetary environment in Asia could stimulate economic growth, thereby increasing demand for products such as oil, grains, sugar, coffee, and others. Combined with a gradual depreciation of the dollar, this could create a more bullish outlook for commodity prices.
Written by Victor Arduin
victor.arduin@hedgepointglobal.com
Reviewed by Laleska Moda
laleska.moda@hedgepointglobal.com
www.hedgepointglobal.com

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