Asia-Pacific central banks seen cutting interest rates despite weaker currencies

Despite weaker Asia-Pacific currencies, central banks in the region— including the Philippines'—are expected to continue with monetary policy easing to boost domestic consumption, economists said.

"Asian currencies have been under pressure against the US dollar since early October [2024], with fresh volatility breaking out in recent weeks," Alex Holmes, regional director for Asia at the Economist Intelligence Unit (EIU), said in a Jan. 15 report.

Data compiled by the EIU showed that between October 2024 and mid-January 2025, the peso depreciated by 4.4 percent versus the greenback -- among the lowest currency sell-off rates in the region.

On the other hand, the New Zealand dollar, Australian dollar, South Korean won, as well as the Japanese yen, weakened by about a tenth against the US dollar during the same period.

According to Holmes, these worst-performing regional currencies "will face a challenging 2025, remaining volatile and prone to further bouts of weakness."

"However, EIU believes that on an annual basis they will avoid repeating the level of depreciation in recent months, which in several cases has been close to 10 percent," he added.

Holmes mainly attributed the region-wide currency depreciation to expectations that the US Federal Reserve would cut interest rates at a slower pace, alongside geopolitical risks wrought by tariff threats from US President-elect Donald J. Trump as well as a slowing Chinese economy.

With fewer US Fed cuts in the pipeline, "Asian currency volatility is likely to remain elevated," he said.

While monetary authorities in Asia-Pacific have been "more cautious with regard to further easing," Holmes believes that in general, "the trend for regional central banks will remain tipped towards easing this year."

"External factors will be weighed against domestic needs. A crucial difference between the current situation and the bouts of currency weakness in 2023 is that inflation is generally low and under control. That should leave banks some room to maneuver," Holmes explained.

Last December, Holmes forecasted the Bangko Sentral ng Pilipinas (BSP) to lower its policy rate "closer to five percent" by end-2025, from the current 5.75 percent, amid expectations of low inflation and resilient economic growth this year.

"The BSP is more focused on the impact of currency weakness on inflation. With price pressures broadly stable in the Philippines, it carried on with loosening" that began in August 2024, he noted.

However, Holmes cautioned that the US dollar's strength would "unlikely fade much over the coming quarters."

"The early introduction of new tariffs by the incoming Trump administration, with a credible threat of further increases, will drive safe-haven flows into US dollar-denominated assets. Strong issuance of US dollar-denominated debt, especially by the US government, and inflows into equity markets will also provide more significant support than in recent years," he pointed out.

For its part, Japanese banking giant MUFG Bank Ltd. maintained its forecast of a similar 75 basis points (bps) of interest rate cuts by the BSP in 2025, "although external risks, including the path of Fed rate cuts, place some uncertainty around the exact timing" of the anticipated gradual easing.

"We think the Philippine peso can outperform regional currencies in the broader context of swift tariff increases by Trump, but still see the peso rising close to 59.7 as the US dollar strengthens, per our global team's expectations," MUFG Bank senior currency analyst Michael Wan said in a Jan. 8 report.

In its Foreign Exchange Outlook report released early this month, MUFG Bank noted that the peso depreciated against the dollar by 4.2 percent last year, to 57.945:$1 at end-2024 from 55.495 at the start of the year.

"The Philippine peso was probably also helped in December [2024] by seasonal remittances inflows, which we do not expect to continue in the first quarter of 2025," MUFG Bank said.

While MUFG Bank sees the peso trading closer to $60:$1, the domestic currency would likely settle at the 59.7:$1 level in the first quarter of this year, before strengthening to 59.3 in the second quarter, 59 in the third quarter, and 58.8 in the fourth quarter.

"We think the peso can over time outperform the likes of currencies such as the Chinese yuan and South Korean won in the broader context of proposals under a Trump 2.0 administration, and also compared with the Indian rupee, which is likely to see a weaker foreign exchange (FX) outlook in 2025 due to domestic factors," it said.

Singapore-based United Overseas Bank (UOB) also still expects the BSP to slash key interest rates by a cumulative 75 bps this year.

"The BSP will end its easing cycle with three more 25-bp interest rate cuts in the first half of 2025, which will take the terminal overnight reverse repurchase (RRP) rate to five percent throughout the second half of 2025 and 2026," UOB senior economist Julia Goh and economist Loke Siew Ting said in a Jan. 7 report.

"Inflation is expected to be kept in check this year, staying within the BSP's two- to four-percent medium-term target range. We project it to average 2.8 percent, with upside risks from both external and internal forces. They include potential upward adjustments in electricity rates and transport fares, an increase in minimum wages in areas outside Metro Manila, the pass-through effects of digital tax, as well as the implication of the Trump administration's foreign policy agenda on currencies and commodity prices," UOB said.

"The expected within-target inflation outlook for 2025 will provide room for the BSP to adjust its monetary policy stance as economic conditions evolve across the year. Nevertheless, global developments post-US President-elect Donald Trump's inauguration, particularly the US Fed's rate cut trajectory, will be key wildcards to our interest rate call," it added.