After more than two years of currency pain, Asia’s central banks are in for some relief as the Federal Reserve (Fed) is set to cut interest rates by a quarter-point Wednesday. The path for the region’s own monetary policy, though, will be bumpy from here.

Lower rates in the US frees up space for officials in Jakarta to Seoul and Mumbai to move lower too. The prospect for the Fed kicking off a regional cutting cycle has attracted investors, who’ve poured money into emerging Asian debt and equities, helping strengthen currencies in the region.

The question now for Asia’s central bankers is how much they need to cut in the coming months, or whether they even need to cut at all. Places such as India and the Philippines face inflationary risks, while South Korea may prioritise financial stability.

“It would be an error to think the region’s policymakers are chomping at the bit for their chance to commence monetary policy easing,” said Brian Tan, Barclays plc senior regional economist. “It’s not obvious that the economy is just crying out for policy easing and that policymakers need to shift as soon as possible.”

The wake-up call may arrive as soon as this week, with central banks in China, Taiwan and Japan all expected to hold rates, though there’s some chance of a cut in Indonesia. They’re followed by the Reserve Bank of Australia Sept 24, which is also expected to keep rates steady.

Then, in a 10-day spree mid-October, a swath of peers from India to the Philippines issue their own diverging decisions. Markets and economists are at odds on what that will look like.

Swap markets are pricing in a benchmark reduction of 50 basis points for the Reserve Bank of New Zealand on Oct 9, with some chance of easing also expected for the Reserve Bank of India on the same day.

While New Zealand is likely to cut through the rest of 2024 as the economy teeters on the edge of a third recession in two years, analysts see a different picture playing out for the rest of the region.

Inflationary pressures in India and the Philippines are likely to keep policymakers there more cautious, with analysts forecasting only one 25 basis point cut in the fourth quarter, surveys show. Bangko Sentral ng Pilipinas Governor Eli Remolona signaled a quarter-point cut in October or December.

Economists also see only one cut in the final three months of the year from the central bank in South Korea, where officials are keeping tabs on financial imbalances associated with home prices and household loans.

Economists expect the central bank to cut its key rate as soon as it sees signs that the property market is cooling, particularly in Seoul. In Taiwan, as well, real estate market trouble is likely to make officials wary of cutting rates.

The Bank of Thailand will perhaps be the longest holdout, with expectations that the conservative institution will resist government calls to cut until next year at the earliest.  

“Now, central banks are able to focus more on the domestic idiosyncrasies when they are contemplating their monetary policy action,” said Khoon Gho, head of Asia research at Australia and New Zealand Banking Group. “For the last two years or so, when the Fed was hiking aggressively, central banks here were really responding to that pressure on their currencies.”

Two factors may change the picture: A US recession that would strengthen the greenback in a flight to safety or a November presidential election outcome that heralds protectionist policies, hurting trade-reliant countries in the region.

The former isn’t the base case for economists, and the latter isn’t likely to halt the flow of funds into Asia assets just yet.

If Fed Chair Jerome Powell and his colleagues reduce interest rates and signal more cuts are in the offing, that “will keep the party going and we’ll see more money coming to Asia”, said Taimur Baig, chief economist at DBS Group Holdings. “Investors have voted with their feet” for a shallow easing cycle in Asia, he said.

  - Bloomberg