Emerging Asia stands to benefit from cuts in US interest rates that now look increasingly likely and imminent. The region mainly uses the US dollar for trade and investment transactions, effectively making it a dollar bloc. While US rates remained high, Asian economies suffered, held back by still high real (inflation-adjusted) local rates even as regional inflation fell. That is about to change.
Impending cuts in US interest rates should provide Asia with a liquidity boost. Since inflation in Asia is lower than in many major developed economies, the beginning of a US rate-cutting cycle leaves regional central banks well positioned to follow suit. Late last month, US Federal Reserve Chair Jerome Powell flagged the Fed’s first move to lower borrowing costs, saying that “the time has come”.
Other central banks have already kicked off campaigns to lower rates as economies slow and demand for labour tapers off. With monetary policy shifting to a more aggressive easing, global growth should benefit.
Such a benign macroeconomic backdrop underpins our constructive view on emerging market debt in local currency, including Asian local EM bonds.
