Macroscope | Why Asian central banks are starting to decouple from the Fed

Eager to boost domestic demand and more able to preserve financial stability, the region’s policymakers are embracing greater monetary independence

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A teller counts Indonesian rupiah bank notes in Jakarta, Indonesia, in October 2022. Photo: Reuters

Published: 4:30pm, 20 Feb 2025

One after another, major central banks in Asia and the Pacific region are cutting interest rates. On February 18, the Reserve Bank of Australia reduced borrowing costs for the first time in four years as inflationary pressures continue to ease, giving the central bank more confidence that prices are moving to the midpoint of its 2-3 per cent target range.

Earlier this month, the Reserve Bank of India lowered rates for the first time in almost five years even though inflation remains above its 4 per cent target. India’s growth rate is expected to have slowed to a four-year low of 6.4 per cent in the 12 months ending in March, down from 8.2 per cent in the previous financial year.

In fact, with the exception of Malaysia, Vietnam and Taiwan, all the other main economies in the region have reduced interest rates since last August, when the Reserve Bank of New Zealand began to loosen policy as the economy fell into recession. The only country moving in the opposite direction is Japan, which is normalising policy after many years of ultra-loose financial conditions.

The wave of monetary easing across Asia is remarkable for a number of reasons. As Bank of America noted, “there has long been a perception that central banks in Asia, especially those smaller ones, tend to ‘follow’ the [US Federal Reserve’s monetary] policy cycle.”

The interest rate cuts, especially this year, are even more striking given the Fed’s decision last month to pause its easing campaign mainly due to concerns about the inflationary impact of US President Donald Trump’s policies. Having priced in several rate cuts this year when the Fed began loosening policy last September, bond markets now expect only one reduction. Some Wall Street banks believe the Fed is done easing policy and may even have to start raising rates again.

Asian central banks must be careful not to diverge too sharply from the Fed. The prospect of US interest rates remaining higher for longer caused the US dollar to rally dramatically in the last three months of 2024, putting Asian currencies under severe strain.

A currency dealer works in front of electronic boards showing the Korean Composite Stock Price Index and the exchange rate between the US dollar and the South Korean won, in Seoul, on December 9, 2024. Photo: Reuters