Asian central banks likely to cut rates from late June onwards: Morgan Stanley

Asian central banks are likely to begin cutting rates from late June onwards, global brokerage Morgan Stanley said.

“Across the region, real rates are rising given lower inflation. As long as central banks begin to cut rates from June-July, the downside to growth will be mitigated by improving exports and capex. The risk is if rate cuts are delayed to next year,” Morgan Stanley said.

As inflation continues its downward descent, real rates across Asia are rising. Central banks are held back from cutting rates by the strength of the US dollar and repricing of the Fed rate path.

“Risks arise if rate cuts are held back to 1Q25 or later due to Fed rate cuts getting delayed and/or supply concerns lift oil prices to $110-120/bbl,” Morgan Stanley said.

With Asia moving back towards the pre-pandemic low-inflation environment, real rates in the region have risen to five-year highs. On a 12-month forward CPI basis, Asia ex-China ex-Japan real rates have reached 1.7 per cent, slightly above the pre-Covid five-year average of 1.5 per cent.

Fed rate cuts are getting priced out and the dollar is still strengthening, while Asian currencies remain on the weaker side. Central banks may be cautious that the potential for further currency depreciation may yet impart some upside to inflation, bringing the risk that inflation does not stay durably within target, the brokerage said.

“Hence, we have been highlighting that Asian central banks will wait for the Fed to begin cutting rates in June before they embark on policy easing,” Morgan Stanley said.