Asian central banks will not cut rates ahead of the Fed: Morgan Stanley
To be sure, the extent of the Fed rate hike cycle eventually did lead some central banks to hike more than they would have just by looking at domestic considerations. But by and large, central banks had been able to respond mainly to domestic issues rather than moving in lockstep with the Fed.
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NEW DELHI: The latest commentary from Asian central banks signals that they have adopted a wait-and-see approach to rate cuts, foreign brokerage, Morgan Stanley said.
While inflation is coming off, in most of the region's economies it has either just reached the target range or is still closing the gap to target range. Central banks are not sounding outright dovish, however, as dollar strength has meant that Asian currencies remain on the weaker side. The potential for further depreciation could still impart some further upside to inflation and may mean inflation does not durably stay within target, holding back rate cuts.
On the way up, central banks in Asia did not have to synchronise their rate hike cycles with the Fed in terms of timing and magnitude. Central banks in Asia had some degree of independence accorded to them by the fact that domestic conditions -- i.e. macro stability indicators -- were very much in check, Morgan Stanley said.
To be sure, the extent of the Fed rate hike cycle eventually did lead some central banks to hike more than they would have just by looking at domestic considerations. But by and large, central banks had been able to respond mainly to domestic issues rather than moving in lockstep with the Fed.
Based on the latest policy documents and public comments from central banks around the region, they are not rushing to cut rates just yet, Morgan Stanley said.
Asia’s inflation has continued to trend lower. Asia is on track to transition towards its pre-pandemic low-flation environment. As things stand, six of nine economies in the region have already seen inflation return to their central banks' comfort zones, the report said.
Core inflation dynamics are benign for most economies across Asia but it is food prices that are causing near-term volatility in inflation. For instance, in the case of India, core inflation is now down to 3.6% but the run-up in food inflation lifted headline inflation to a peak of 7.4%Y in July-2023 before the reversal in food prices brought it back down to 5.1% in January-2024, the report said.
Moreover, Asian currencies have been relatively weak and potential depreciation pressure could yet arise given the trailing strength of the dollar, which adds to the concerns policymakers have about inflation staying within target, it added.
