The recent decision by the U.S. Federal Reserve in September to lower interest rates has triggered a wave of easing across global markets, particularly within emerging economies in Asia. As central banks in this region respond to slowing economic growth and rising uncertainties, we witness significant shifts in monetary policy aimed at invigorating fragile economies.

On October 16, 2023, the Bank of Thailand surprised many observers by voting 5 to 2 in favor of a 25 basis point cut, reducing the benchmark rate to 2.25%. This marks Thailand's first rate decrease since 2020, a strategic move to stimulate a sluggish economic landscape. Similarly, the Philippine central bank also announced a reduction of 25 basis points, bringing their rate down to 6% to bolster the economy against the backdrop of increasing external uncertainties. Just the week prior, the Bank of Korea also opted to reduce its rate by 25 basis points to settle at 3.25%. The Reserve Bank of India, while maintaining its current rate, adopted a neutral stance that hints at future cuts.

In tandem with these cuts, Thailand has adjusted its economic growth forecasts for the coming years, raising its projection for 2024 from 2.6% to 2.7%, but tempering expectations for 2025 from 3% to 2.9%. Meanwhile, inflation predictions have also been adjusted; Thailand now expects a general inflation rate of 0.5% for 2024, slightly below the target range of 1% to 3%. The Philippines followed a similar trend, revising its inflation expectations down from 3.3% to 3.1% for 2024, although the 2025 forecast has been raised from 2.9% to 3.3%.

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Economists anticipate both Thailand and the Philippines could implement another 25 basis points reduction in December. Thailand is grappling with high household debt, elevated borrowing costs, and declining export performance, leading to its economic growth lagging behind regional peers. Conversely, the Philippines is experiencing low inflation relative to the central bank's target, indicating a potential for further easing.

Thailand's central bank has maintained its interest rates at a decade-high of 2.5% since September 2023. The unexpected cut led to a 2.54% increase in Thailand's benchmark SET Index, while the Thai baht weakened, trading at a low of 33.384 baht to the dollar.

The Philippines, on the other hand, saw its interest rates drop to the lowest level since February 2023. Following the announcement of the rate cut, the Philippine Stock Exchange Index (PSEi) experienced a minor dip, with the Philippine peso showing minimal fluctuations against the dollar.

Looking more closely at Thailand's situation, the country has been adversely impacted by high household debt, which as of June 2023 totaled 16.3 trillion baht (approximately 488.9 billion USD), representing 89.6% of GDP, one of the highest ratios in Asia. The central bank's statement emphasized the importance of the rate cut in alleviating household debt burdens without impairing the efforts to reduce debt ratios relative to GDP.

Additionally, the recent appreciation of the baht, which surged 14% in the last quarter, has placed Thai exports at a competitive disadvantage. As pointed out by Miguel Chanco, Chief Emerging Asia Economist at Pantheon Macroeconomics, the rapid strengthening of the baht made the case for a rate cut even more compelling. There is growing speculation that the Bank of Thailand may pursue further cuts in December.

Just hours before the interest rate decision, Thailand's Minister of Commerce, Pichai Naripthaphan, advocated for a 50 basis point cut this year, alongside requests from the Federation of Thai Industries for a 25 basis point reduction to alleviate corporate financial pressures.

In adjusting its forecasts, the Thai central bank has also lowered its overall inflation rate predictions for 2024 to 0.5%, still below the stated goal range.

Turning our attention to the Philippines, this marks the second rate cut for the country this year, with further reductions expected in December. Governor Eli Remolona indicated that today’s cut reflects the continuation of an easing cycle that began in August with a similar 25 basis point reduction, which predates moves made by the U.S. Federal Reserve.

The expectation of a rate cut in the Philippines was not unexpected, given the continued easing of inflation, coupled with increasing external uncertainties. Analysts suggest there remains room for additional cuts, with the December meeting potentially mirroring today’s 25 basis point adjustment, especially as inflation has consistently remained below the central bank's target range of 2% to 4%. While government data for the second quarter indicated a 6.3% year-over-year GDP growth, the quarter-on-quarter increase stood at a modest 0.5%.

Today’s decision by the Philippine central bank also resulted in a downward revision of its inflation expectation for 2024 from 3.3% to 3.1%, although 2025 and 2026 forecasts see slight increases to 3.3% and 3.7% respectively.

In the wider region, last week saw South Korea lowering its interest rates for the first time since the pandemic, with this reduction bringing its rate down to 3.25%. This move, compliant with market expectations, has sparked speculation about the onset of a broader easing cycle. Analysts predict that after this cut, the Bank of Korea may lower rates consecutively over the next three quarters, potentially reaching 2.5%.

Meanwhile, the Reserve Bank of India opted to maintain its current rates but shifted its policy stance to neutral for the first time since June 2019, prompting expectations for potential cuts in the December meetings.

In summary, as central banks across Asia reevaluate and adjust their interest rates, the overall economic landscape shows a clear trend towards easing in response to mounting pressures. These actions illustrate not only the dynamic economic environment but also the interconnectedness of regional markets as they navigate challenges posed by external influences and domestic pressures.