Slower Rate Cuts Expected Across Asia-Pacific and Emerging Markets

The prospect of delayed US interest rate cuts by the Federal Reserve is poised to have significant implications for monetary policy and exchange rates across Asia-Pacific (APAC) and emerging markets (EMs), according to a recent report by S&P Global.

Asia-Pacific: Slower Pace of Rate Reductions

Central banks in the APAC region are expected to delay and slow down their policy rate reductions in response to the Fed's revised timeline. This cautious approach reflects the sensitivity of capital flows and exchange rates in the region to interest rate differentials with the US.

"Several central banks want to contain depreciation pressure to limit the impact on inflation via higher import prices," explains the S&P Global report. "We think some will adjust their plans to the new U.S. rates outlook to avoid currency weakening from encouraging capital outflows."

The report anticipates larger revisions to exchange rate projections for countries where policy rate forecasts remain largely unchanged, such as Japan.

Emerging Markets (Excluding Asia): Prolonged Monetary Policy Normalization

S&P Global also forecasts a slower process of monetary policy normalization in most major emerging markets outside of Asia. The interest rate differential between EMs and the Fed plays a crucial role in determining capital flows and influencing exchange rates, which in turn can impact inflation through pass-through effects.

Central banks in EMs, currently maintaining restrictive monetary policies to combat inflation, are likely to remain cautious in their approach to easing. The delayed start to Fed rate cuts could reinforce their commitment to anchoring inflation expectations, leading to a longer-than-anticipated process of shifting monetary policy towards a neutral stance.

"A delayed start to fed rate cuts will likely affirm EM central banks' determination in anchoring inflation expectations--meaning the process of shifting monetary policy to neutral from restrictive will take longer than previously assumed," states the report.

The report anticipates a slower pace of rate cuts in countries like Brazil, Chile, and Peru, while central banks that have just begun easing, such as Mexico's, may pause before resuming later this year. Central banks that have not yet started reducing rates, like South Africa's, are expected to take longer to begin the process.

Despite the anticipated delays in monetary policy normalization, S&P Global does not foresee major changes in exchange rates for EMs outside of Asia. This is because the impact of higher US interest rates is expected to be largely offset by similar increases in EM interest rates, maintaining relatively stable interest rate differentials. Additionally, strong US economic growth is expected to have a positive impact on capital flows to major EMs.

"At this point, we do not expect major changes in the exchange rates of EMs outside of Asia, which already assume modest depreciations versus the U.S. dollar this year," concludes S&P Global.