In brief
- As of mid-point of 2025, APAC central banks face an increasingly complex economic outlook marked by escalating geopolitical and trade tensions. The weakened correlation with Federal Reserve policy suggests future monetary policies will be driven by regional and domestic factors.
- Tariffs have dampened regional growth, prompting revisions to forecasts and calls for additional fiscal and monetary support. Declining inflation has enabled regional central banks to cut rates, but uncertainty is keeping them cautious.
- APAC cash investors should focus on diversification, stability, and liquidity to navigate interest rate changes and market volatility. Despite the challenges, historically high interest rates present relatively attractive yields. Strategic duration adjustments could enhance yield opportunities while managing risks.
Regional Overview
As we reach the mid-point of 2025, central banks and investors in Asia-Pacific (APAC) face an increasingly complex economic landscape marked by escalating geopolitical concerns, volatile trade tensions, and lingering domestic challenges.
In the early months of the year, weaker yet positive economic growth and moderating inflation enabled many central banks to start cutting rates. However, most remain cautious and focus on preventing real rates from becoming overly restrictive. Notably, China’s PBOC held rates steady, while Japan's BOJ ended quantitative easing and was hiking rates as inflation reached multi-decade highs.
Fig 1: APAC central banks have started cutting rates, pushing money market rates lower.
Source: Bloomberg and J.P. Morgan Asset Management, data as at 12 Jun 2025
Reserve Bank of Australia (RBA)， Reserve Bank of New Zealand (RBNZ)， Central Bank of the Republic of China (CBC)，(BNM)，Bank of Korea (BOK)，Bank of Japan (BoJ)，Bank of Thailand (BOT)，Bangko Sentral ng Pilipinas (BSP)， Bank Indonesia (BI)， Hong Kong Monetary Authority (HKMA)，People’s Bank of China (PBOC) ， Federal Reserve (Fed)；Singapore (SG), Australia (AU), China (CH), Hong Kong (HK), United States (US), Taiwan (TW), Japan (JP)
Tariffs and tensions
The imposition of U.S. tariffs in early April has significantly impacted regional economic dynamics, with APAC markets among the hardest hit by the larger-than-expected charges.
Tariffs dampen economic growth across many markets by undermining confidence, impacting trade-related jobs, reducing spending power, and weakening demand. The effects of tariffs on inflation are more nuanced: importers typically experience a one-time increase in inflation due to higher prices, while exporters face lower inflation due to excess supply. Erratic US policy pivots could also negatively impact longer-term inflation expectations, while front-loading and re-routing of goods further complicate the economic outlook.
Following the tariff announcements, economists sharply revised their APAC economic growth and inflation forecasts downward. The revision suggests that multiple, rapid central bank rate cuts and additional fiscal support might be necessary to prevent a recession. However, heightened uncertainty coupled with solid domestic economic data has created a dilemma for regional central banks. It has complicated growth and inflation forecasts and made monetary policy decisions more challenging.
Since the Asian Financial Crisis, APAC central banks have traditionally followed the Federal Reserve's monetary policy to avoid foreign exchange and capital market volatility. However, since "Liberation Day" in early April, this correlation has broken down, with local currencies appreciating amid capital inflows - despite rising US bond yields. This suggests that future APAC central bank policy will increasingly be driven by regional and domestic factors rather than US monetary policy.
Regional central bank trends
China: The economic outlook remains challenging, with a weak property sector, muted sentiment and deflation weighing on domestic demand. Fortunately, despite rising trade tensions, exports and manufacturing remain strong. Rate cuts by the PBOC, along with government stimulus measures such as infrastructure spending and trade-in subsidy schemes, have, at least temporarily, boosted borrowing and consumption.
Although growth is expected to slow in the second half of 2025, the current solid performance should enable the government to achieve its annual targets, suggesting fewer future rate cuts by the PBOC. With significantly weaker growth already priced in, SHIBOR and bond yields have declined sharply, indicating limited room for further declines.
Australia: The first half of 2025 presented mixed economic data. GDP growth moderated due to subdued consumer and business spending, influenced by economic uncertainty and ongoing cost-of-living concerns. However, strong employment figures, a robust housing market, and a rebound in exports highlight the economy's solid foundation.
Opportunely, inflation continues to moderate with both headline and core readings now within the RBA’s target range, allowing the bank to begin its rate cutting cycle. The decision to cut interest rates twice in the first half of 2025 reflects a growing confidence that inflation risks have subsided. However, the RBA remains cautious about Australia’s economic outlook and the path of future monetary policy actions. While we anticipate further rate adjustments, we believe the pace will likely be gradual.
Hong Kong: Economic growth improved in the first half of 2025, with trade and financial sectors retaining recent gains, tourism rebounding, and signs of housing market stabilization. However, trade tensions, continued government fiscal deficits, and muted sentiment remain concerns.
In May, the HKD strengthened due to strong equity performance and dollar repatriation. This pushed HKD to the strong side of convertibility, prompting HKMA intervention to protect the USD peg. Consequently, HIBOR rates fell sharply, and despite arbitrage opportunities, high liquidity has kept rates low. With HKD now at the weak side of convertibility, HKMA intervention could raise HIBOR rates, but we believe they may remain lower than previous levels unless global interest rates or local conditions change.
Singapore: GDP declined in the first half of 2025 as the prospect of US tariffs negatively impacted on the city’s trade dependent and globally integrated economy. Domestic demand also moderated due to reduced tourist spending and lower consumer confidence.
Fortunately, inflation pressures have eased. This enables the MAS to adopt a dovish stance, resulting in two reductions of the SGD NEER slope this year. The government has introduced fiscal measures to boost spending and confidence; nevertheless we anticipate further monetary easing by the MAS in the year's second half. The weaker currency outlook and dollar repatriation have boosted local liquidity, lowering SORA rates, a trend likely to continue throughout the remainder of 2025.
Conclusion
As we reach the mid-point of 2025, the APAC region faces an increasingly complex economic landscape shaped by geopolitical tensions and trade uncertainties. The correlation between regional central banks and Federal Reserve policy has weakened, indicating future APAC monetary policies will be increasingly driven by regional and domestic factors. With inflation declining, further interest rate cuts are likely, though high levels of uncertainty mean central banks will remain data-dependent and cautious.
In uncertain times, cash investors should consider core investment principles to ensure resilience. As we navigate interest rate changes and elevated market volatility, diversification, stability, and liquidity in portfolios are crucial. Fortunately, interest rates remain historically high, presenting relatively attractive yields. In addition, strategic duration adjustments and tenor diversification could help investors seize yield opportunities while managing risks effectively.