The U.S. Federal Reserve’s decision to cut its benchmark interest rate by 25 basis points to a range of 4%–4.25% has opened the door for Asian central banks to further loosen monetary policy. The move comes as the region continues to navigate trade challenges and currency fluctuations.
Fed Chair Jerome Powell described the step as a “risk management cut” rather than a measure to counter economic weakness, signaling that at least two more rate cuts could follow this year.
The Fed’s action has narrowed the gap in bond yields between the U.S. and Asia, easing concerns over currency depreciation and giving Asian economies — especially those under domestic pressure — more flexibility to lower rates.
Some regional banks had already acted ahead of the Fed. The Bank of Korea reduced its policy rate in May to the lowest in nearly three years. The Reserve Bank of Australia cut rates in August to a two-year low, while the Reserve Bank of India surprised markets in June with a larger-than-expected 50-basis-point cut.
Differences in domestic conditions, such as inflation and the impact of U.S. tariffs, mean that monetary paths will continue to diverge. Still, export-driven economies like South Korea, Singapore, and Japan all delivered stronger-than-expected growth in the second quarter, avoiding a technical recession.
Economists at Oxford Economics expect central banks in South Korea and India to keep cutting rates through the fourth quarter, supported by a weaker U.S. dollar. Analysts at BNP Paribas noted that real interest rates across much of Asia remain above historical averages, creating space for a longer rate-cutting cycle compared to the U.S.
India, despite solid growth driven by domestic demand, may still pursue further easing. Inflation edged up to 2.07% in August, comfortably within the Reserve Bank of India’s 2%–6% target, leaving “ample room” for additional policy support if growth headwinds intensify.
In contrast, China and Japan are resisting the regional trend. The Bank of Japan is expected to hold steady at its upcoming meeting, with the possibility of further hikes later this year as inflation has stayed above its 2% target for over three years.
China’s central bank, meanwhile, kept its short-term lending rate at 1.4% after the Fed’s decision. The move reflects Beijing’s balancing act between stimulating growth and avoiding asset bubbles reminiscent of 2015.
China’s economy has shown signs of slowing, with weaker-than-expected export growth and sluggish retail sales and industrial output in August. Yet the yuan has strengthened about 3% against the dollar this year, with economists forecasting a further climb to 7 per dollar by year-end.
Analysts believe the People’s Bank of China may eventually adopt more monetary easing in the medium term, given mounting domestic challenges and global demand pressures.
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