Nomura Predicts Fed Rate Cuts, Potential Impact on Asian Central Banks
Japanese brokerage firm Nomura has revised its forecast for US Federal Reserve rate cuts, predicting a total of 75 basis points (bp) this year. This follows the dovish surprise in the July employment report, which indicated a slowdown in the labor market.
Nomura expects the Fed to begin cutting rates as early as September, with a 25 bp cut followed by additional 25 bp cuts in November and December. This is a more aggressive timeline than their previous forecast of two 25 bp cuts in September and December.
While Nomura acknowledges the risks of a worsening labor market, they believe the current deterioration is not a long-term trend. However, they warn that if job losses increase or financial conditions tighten further, the Fed may consider larger 50 bp cuts.
This potential easing of Fed policy could have implications for Asian central banks, particularly those in Indonesia, Korea, and the Philippines. These economies are sensitive to Fed actions and foreign exchange risks, and may implement policy easing sooner than others.
Nomura analysts predict that Bank Indonesia (BI) and Bangko Sentral ng Pilipinas (BSP) could cut rates earlier, while Bank of Korea (BOK) may wait until October due to concerns about housing prices.
In India, Nomura expects the Reserve Bank of India (RBI) to start easing rates from October. While the market often assumes the RBI follows the Fed closely, Nomura believes the RBI will prioritize domestic conditions and act independently.
Despite inflation remaining above the target of 4%, Nomura believes the RBI's recent economic assessment suggests that meeting this target is not a prerequisite for a policy shift. With slowing growth and expected moderation in credit growth, Nomura anticipates policy rate adjustments lower.
Nomura expects rates to remain unchanged at the August meeting, but projects a 75 bp reduction in FY25, bringing the terminal rate down to 5.75% from the current 6.5%. However, they note that if global growth slows more rapidly, terminal rates could be even lower.