Asian economies that showed great resilience post the 2008 financial crisis have led the recent global rate tightening cycle. However, threats of a global economic slowdown are now forcing central banks in the region to quickly reverse course.
"The global interest rate cycle has well and truly started to turn back down and Indonesia is just the latest to follow suit," Shane Oliver, head of investment strategy at AMP Capital Investors, told CNBC on Wednesday.
In a surprise move on Tuesday, Indonesia cut its benchmark rate to a record-low 6.5% from 6.75%. Outside Asia, central banks in Brazil, Russia, Israel and Turkey have all recently cut interest rates.
"More central banks are likely to cut going forward as slower global growth takes pressure off inflation and central banks shift their focus to stopping unemployment from rising," Oliver added.
Oliver points to the Reserve Bank of Australia as the next candidate in the region for a rate cut.
"Australia will likely cut at its next meeting (in November). Global growth has cooled, commodity prices have fallen, domestic growth is soft and inflation is becoming less of a threat," he said. He forecasts a 25 basis point cut taking the benchmark rate to 4.5%.
On Thursday, the Bank of Korea kept rates on hold at 3.25% for a fourth consective month, but some economists have begun to predict a rate cut at its next meeting. India, which is due to hold its central bank policy meeting on October 25, also hinted at a possible rate cut this week.
According to Reuters, the Reserve Bank of India`s deputy governor, Subir Gokarn, said Wednesday that the government`s policy stance would change if there were signs inflation was easing.
However, economists including Rajeev Malik of CLSA Singapore and Devika Mehndiratta of Credit Suisse believe policy easing is unlikely for the moment.
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Though it has become a close call given increasing signs of domestic growth slowing, the RBI is likely to go for a last 25 basis point hike on October 25," Mehndiratta said.
Impact of Rate Cuts on Foreign Inflows
According to Oliver, rate cuts in Asia might be a short-term dampener for foreigner inflows. Attractive yields in Asia have drawn a significant amount of foreign funds in to the region`s debt markets after the financial crisis.
However, Oliver adds that the outflows will likely prove to be small as central banks in major advanced economies also begin to ease policy.
"ECB is itself likely to cut rates soon and the Fed is likely to follow the Bank of England down the path of more quantitative easing," Oliver said.
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