ECONoMYNEXT – Growth concerns could support the case for Asian central banks easing rates further, economists at the Asian Development Bank have said, despite the risk of higher-for-longer US rates. Sri Lanka’s central bank has already lowered interest rates.
“For Asia’s developing economies, cutting rates in the absence of a corresponding cut by the US Federal Reserve (Fed) runs the risk of currency depreciation and imported inflation,” ADB’s John Beirne, Matteo Lanzafame conceded in their article “Why Central Banks in Asia Should Consider Cutting Interest Rates“.
The central banks of seven regional economies — People’s Republic of China, India, Republic of Korea, Pakistan, the Philippines, Sri Lanka, and Thailand — have already lowered interest rates, they pointed out, adding “Many Asian currencies have strengthened against the USD since the start of the year, offering Asian central banks more room to ease monetary policy”.
They give four reasons for further policy rate cuts in the region, ‘depending on the degree to which they apply to individual economies and other country-specific factors’.
“First, price pressures continue to decline in most economies in Asia and the Pacific. After the pandemic, inflation surged worldwide. Asian central banks, like their peers in other regions, tightened policy aggressively to stabilize prices. The lagged effects of this monetary tightening will still help to moderate inflation this year, but now the picture looks very different. Food and energy prices, key drivers of inflation in Asia, have fallen sharply. For 13 of the 17 inflation-targeting economies in the region, inflation is now at or below target.
“Second, real interest rates are high. While central banks in the region have already started loosening policy, interest rates have come down more slowly than expected inflation, so that real interest rates—the difference between the two—remain elevated, and in many cases are higher than average over the past decade. This means that borrowing costs are high, constraining consumption and investment just as strengthening domestic demand could help offset the hit to exports from higher tariffs and trade uncertainty.
“Third, growth is set to slow, further adding to disinflationary pressures. Forecasts in ADO April 2025 indicate that growth will decelerate in 24 out of the 46 economies in Asia and the Pacific this year. These projections do not account for the new US tariffs of April 2, which could be reinstated on 8 July after a 90-day pause and further reduce regional growth.
“Tariffs aside, global demand is being buffeted by trade uncertainty, and rising financial volatility and risk aversion. A slowing global economy is bad news for all exporters across the region—whether of textiles in Bangladesh, electronics in Malaysia, or services in India. Additionally, the knock-on effects on investment, job creation, productivity, and consumption could further dampen economic activity. As a result, consumer confidence has weakened. Purchasing Manager Indexes, a leading indicator of economic activity, signaled contractions in April and May for several economies in Asia.
“Fourth, unlike past global risk aversion episodes, where flight to safety would boost the US dollar (USD), the USD has weakened this year. US policy uncertainty and slowing growth have resulted in investors repositioning and the dollar depreciating—by 4.8% against a basket of global currencies, 7.1% against advanced economy currencies, and 2.6% against emerging economy currencies.
However, they caution that tariff-related supply shocks and shipping disruptions could affect some economies more than others, pushing up the cost of imported goods.
“In such cases, premature easing might hinder central banks’ ability to anchor inflation expectations, especially in economies where imported goods account for large shares of consumption baskets. Ongoing negotiations on US tariffs are a further consideration, as they may result in reduced trade tensions and, thus, less need to ease the monetary stance.
“A cautious approach to easing, therefore, continues to be warranted. However, in light of a worsening external environment and moderating inflation, growth concerns may soon take center stage in developing Asia. Central banks in the region should stand ready to act and cut.”
(Colombo/Jun12/2025)
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