Elevated uncertainty

The interest rate outlook for Asia-Pacific (APAC) financial markets in 2025 is clouded by geopolitical risks and escalating trade tensions.  While moderating prices have allowed Asian central banks to switch their focus from curbing inflation to supporting economic growth through rate cuts, the frequency and magnitude of these actions remains uncertain.  Market volatility will be further amplified by central bank’s reliance on unreliable data.

Federal Reserve (Fed) policy will continue to exert significant influence across the region, but local factors such as the impact of potential tariffs, domestic economic conditions and the effectiveness of China’s stimulus will also play crucial roles in shaping APAC central banks’ thinking.

Growth and Inflation

Regional growth has slowed due to restrictive monetary policies, weaker Chinese growth and softer domestic demand despite robust exports. Rising trade tensions between the U.S. and China have increased uncertainty, posing risks of further regional economic disruption. 

Fortunately, inflation finally began receding in 2024, a trend expected to continue in 2025. This has allowed some APAC central banks to start cutting interest rates, although not all have done so. The pace of inflation decline has slowed recently, with strong aggregate demand and sticky service prices offsetting falls in goods price inflation. Consequently, many central banks are hesitant to cut rates quickly. We believe further monetary policy loosening is likely to be seen as a precautionary measure to achieve a soft landing and prevent real rates from becoming too restrictive, rather than a proactive step to prevent a recession.

Fig 1: APAC base rates have hit multi-decade highs as central banks worked to curb inflation.

Source: Bloomberg, J.P. Morgan Asset Management; data as at 30th December 2024.

Federal Reserve (Fed), Bank of Japan (BoJ), Reserve Bank of Australia (RBA), People’s Bank of China (PBOC), Reserve Bank of New Zealand (RBNZ), Central Bank of the Republic of China (CBC), Bank Negara Malaysia (BNM), Bank of Thailand (BOT), Bangko Sentral ng Pilipinas (BSP), Bank of Korea (BOK)

United States (US), Australia (AU), Japan (JP), China (CH), New Zealand (NZ), South Korea (SK), Thailand (TH).

Regional central bank trends

China: The era of rapid economic growth has ended, with the economy facing cyclical and structural factors including a property downturn and muted consumer confidence.  Recent policy measures represent a significant policy boost but appear aimed at stabilizing rather than reigniting growth.  As the People’s Bank of China (PBOC) pivots from a “prudent” to “moderately loose" monetary policy, further rate cuts are likely in 2025, pushing short tenor yields to new lows. 

Australia: The Reserve Bank of Australia (RBA) remains concerned about persistent inflation driven by robust demand, tight labor markets and rising services costs.  Having raised rates less aggressively than other central banks, it is reasonable to anticipate the RBA will lower them less aggressively as well.  We expect the first rate cut will not happen until the second quarter of 2025, as the RBA awaits confirmation that inflation is returning to target.

Singapore: The Monetary Authority of Singapore (MAS) was among the first central banks to hike interest rates, doing so several months before the Fed.  Solid economic growth, supported by robust exports, has allowed the traditionally hawkish MAS to maintain a strong currency stance to combat imported inflation.  With prices now moderating, risks have become more balanced, opening the possibility of policy easing in the first half of 2025. 

Hong Kong: Inflation remains muted and economic growth has improved, though key demand drivers like trade, services and tourism remain weak.  Fortunately, the HKD peg means local HIBOR rates will follow US yields lower, supporting the property market and domestic demand, but this also means a significant dependence on the Fed to deliver further rate cuts.

Japan: The Bank of Japan (BoJ) stands as the regional outlier for having raised interest rate twice in 2024 to a 17-year high of 0.25%.  Improving economic growth, rising inflation and lagging wage growth have led to a cost-of-living crisis, suggesting further rate hikes are likely in 2025, though domestic political uncertainty could lead delays in monetary policy adjustments.

Fig 2: APAC interest rates have peaked, and yield curves have flattened in anticipation of rate cuts

Source: Bloomberg, J.P. Morgan Asset Management; data as at 30th December 2024.

APAC Interest Rate outlook

Market driven interest rates have risen significantly over the past three years, reaching multi-decade highs.  While we believe rates have likely peaked, they remain elevated, providing attractive yields to cash investors.  

Future APAC central bank actions are expected to be interest rate cuts, but we would emphasis caution when considering extending duration.  Yield curves have flattened, making it more challenging to add longer maturity securities without sacrificing significant yield.  Additionally, market volatility remains elevated due to geopolitical concerns and central banks prioritize data dependency.

In times of uncertainty and volatility, it is crucial for cash investors to remain focus on core investment principles: liquidity, security, and yield.  High real yields and volatile interest rates highlight the benefits of money market and ultra-short duration strategies. These strategies could serve as core components of investment portfolios; offering offer diversification, stability and liquidity. 

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

This information is generic in nature provided to illustrate macro trends based on current market conditions that are subject to change from time to time. This generic information does not take into account any investor’s specific circumstances or objectives and should not be construed as offer, research or investment advice.