Moderating inflation has allowed central banks to shift their focus towards fostering economic growth, signaling an impending monetary policy pivot. While markets have quickly priced in multiple rate cuts, the pace and magnitude of central bank actions remain uncertain. For APAC cash investors, the implications of the Federal Reserve (Fed) policy continues to be significant; but local inflation, economic conditions, and political nuances will also influence regional cash investment strategies.

Are APAC central banks about to start an interest rate cutting cycle? 

Not entirely. While the Reserve Bank of New Zealand (RBNZ) and the Central Bank of the Philippines (BSP) have already cut interest rates, other central banks in the region, such as Malaysia, Thailand, and Indonesia, are waiting for definitive action from the Fed before reducing their base rates. The People's Bank of China (PBoC) has already cut interest rates several times this year. In contrast, the Reserve Bank of Australia (RBA) is likely to maintain higher interest rates for a longer period, while the Bank of Japan (BoJ) has finally abandoned its negative interest rate policy and has begun hiking rates.

How have key drivers of APAC central bank monetary policy changed? 

APAC central banks face multiple, sometimes conflicting goals: controlling inflation, supporting domestic growth, and avoiding currency volatility.

• China: A fragile property market, muted consumer confidence, and a moderating export sector suggest a further economic slowdown is likely.  Despite the government’s commitment to a 5% growth target, a lack of substantive fiscal actions has shifted focus to additional monetary policy support. Fortunately, a weaker USD and lower Fed Funds rate may allow the PBoC to cut rates further but aiming to stabilize rather than reignite growth.
  
• Australia: The RBA is concerned about persistent and elevated inflation due to strong demand and a robust labor market. It appears unwilling to risk a recession by hiking rates further, rather suggesting rates will remain higher for longer until inflation is sustainably within the target range.
• Japan: Moderate growth and rising inflation have led to a cost-of-living crisis, with wage growth lagging price increases. In response, the BoJ raised policy rates, with Governor Ueda indicating possible further hikes this year, though not imminently due to recent market volatility.
• Singapore: Falling inflation and solid economic growth have allowed the Monetary Authority of Singapore (MAS) to maintain a strong currency stance to combat imported inflation while interest rates decline in line with lower US yields.   
• Hong Kong: Economic growth has improved, but key drivers of demand – including trade, services and tourism - remain weak.  Fortunately, the USD/HKD peg means local rates will follow US yields lower, supporting the property market and domestic demand.
• Regional Outlook: With the Fed pivoting to rate cuts, APAC central banks are likely to follow, boosting domestic demand, which, combined with strong export growth, should benefit regional growth.

Will interest rates remain restrictive?  

Yes, at least in the short term.  Most APAC economies stay robust, while ensuring a sustainably low and stable inflation remains a focus for regional central banks.  Avoiding significant divergence from the Fed’s monetary policy path will be important to prevent currency volatility and avoid significant capital flows.  This suggests APAC central banks will proceed with caution rather than urgency in deciding the pace of future rate cuts, with any loosening of monetary policy viewed as precautionary to help achieve a soft landing.

What potential risks should investors be aware of?

Geopolitical concerns, rising trade tensions, and persistent inflation challenges pose considerable risks for the APAC region.  The uncertain geopolitical environment could further impact fuel and food prices, driving investors towards safe-haven assets. Regardless of the outcome of the U.S. presidential election, fears of increased trade tariffs will likely continue to disrupt regional supply chains and affect export competitiveness. Optimistic markets are anticipating a soft landing for the U.S. economy; however, any resurgence in economic growth or inflation could trigger additional market volatility as investors reassess the Fed's interest rate trajectory. Finally, regional central banks, having not raised rates as aggressively as the Fed, are unlikely to cut rates as swiftly, but any ambiguity regarding the timing and magnitude of rate cuts could exacerbate local currency volatility and capital market flow dynamics.

How should liquidity investors navigate the remainder of 2024? 

We believe adopting a cautious yet flexible approach for the remainder of 2024 is warranted. Given the current market dynamics, maintaining a diversified portfolio segmented across money market and ultra-short duration strategies could help maximize returns while maintaining liquidity.  Ultra-short duration strategies are likely to benefit relatively more under an easing cycle, while money market strategies should sustain relatively higher yields for longer compared to time deposits and cash. Investors should also monitor key economic indicators as central bank monetary policies will remain highly data dependent.

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.