Inflation moderating in Asia, central banks may start cutting interest rates by Q4 2023: Morgan Stanley
Apr 22, 2023
New Delhi [India], April 22 : Inflation in Asia is moderating and the central banks in the region are likely to cut interest rates to support economic growth come the fourth quarter of 2023 (October-December), Morgan Stanley said in a report.
The global investment banking firm said Asia's inflation has already peaked in September 2022 and is on the disinflation path.
"We think central banks in Asia could start cutting rates in 4Q23, ahead of our expectations that the Fed (in the US) cuts rates from 1Q24," the report titled 'Asia Economics: The Viewpoint: Why Asia Could Cut Rates Ahead of the Fed' co-authored by Chetan Ahya, Derrick Y Kam, Qiusha Peng, and Jonathan Cheung said.
Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby enabling the inflation rate to decline and vice versa.
Eight out of 11 central banks in the region have already paused their rate hike cycles in early 2023. They have noted that they would like to assess the impact of their monetary policy tightening on inflation as one of the key reasons why they have paused.
According to the report, inflation is expected to reach the central banks' comfort zone for 90 per cent of Asia by the third quarter of 2023.
"Inflation is well on track to decelerate towards central banks' comfort zones by 3Q23. Eight out of 11 central banks in the region have already paused their tightening cycles," it said.
According to the report, Bank Indonesia will be the first in the region to go ahead with the rate cut. It sees the Bangko Sentral ng Pilipinas, Bank of Korea, and Reserve Bank of India to follow suit.
"For eight out of the past nine months, inflation numbers in Asia have persistently surprised on the downside. More intriguingly, inflation has surprised to the downside by an even wider extent for the first three months of 2023," the report said.
In India, headline consumer price index-based (CPI) inflation (or retail inflation) has gradually declined from its peak of 7.8 per cent in April 2022 to 5.7 per cent in March 2023 and is projected to ease further to 5.2 per cent in the fourth quarter of 2023-24 financial year.
The Reserve Bank of India, in its first monetary policy review meeting in 2023-24 held earlier this month, decided to keep the key benchmark interest rate -- the repo rate -- unchanged at 6.5 per cent, to assess the effects of the policy rate tightening done so far.
RBI had so far raised the repo rate, the rate at which it lends to banks, by 250 basis points cumulatively since May 2022 in the fight against inflation.
