A slowing global economy and abrupt end to Federal Reserve policy tightening have shifted rate cut expectations in Asia to probable from possible, with the market betting on moves by a growing list of central banks.
New Zealand sent the clearest signal on Wednesday when its central bank kept interest rates at a record low of 1.75 percent, but said a weak external environment meant its next move was more likely to be a cut.
Money markets are pricing in a strong chance of a cut in Australia this year. The Philippines, India and Indonesia also have room to reverse some of last year's multiple interest rate hikes aimed at protecting the peso, rupee and rupiah from emerging market turmoil, economists say.
In Malaysia, rate cut calls are growing louder as inflation has turned negative, while policymakers in Japan debated further stimulus amid concerns over waning global demand, according to minutes from the Bank of Japan's March meeting.
A new and unexpected member of the club of potential rate cutters is South Korea, where the government bond yield curve has flattened rapidly, signaling economic weakness that economists believe the Bank of Korea may address. In China, although reductions in bank reserve requirements are seen as Beijing's main monetary policy easing tool, some analysts also expect cuts in benchmark rates.
“This shifting growth-inflation mix combined with a concluded Fed tightening cycle calls for a significant change in the course of monetary policy across Asian economies,” ANZ economists said in a quarterly note on Wednesday. “We now expect all central banks in the region to either hold interest rates or move into accommodation mode,” they said.
This is a remarkable turnaround. Only last year the debate in trade-deficit countries was about how high rates could go, and Japan's central bank was contemplating exiting unorthodox stimulus policies.
However, the tone in Asia is not only set by the Fed.
China's trade war with the United States and several measures to curb financial risk-taking last year are weighing more heavily than expected on the world's second biggest economy and Asia's growth engine.
Inflation in most Asian economies is below, or at the lower end of central bank targets.
Expectations for monetary policy easing have increased with the emergence of a bad omen for economic growth in the United States, and implicitly, the world.
Yields on benchmark US 10-year Treasury notes fell below three-month rates on Friday for the first time since mid-2007, an inversion that preceded every US recession over the past 50 years.
This time might be different because central bankers are not worried about inflation and low yields are a global malaise. Still, investors and policymakers took notice.
Former Fed chief Janet Yellen told a Hong Kong conference on Monday that while the yield curve inversion may not herald a recession, it might signal the need to cut rates.
Extend that rationale to flattening yield curves across Asia, and the circle of potential rate cutters is expanding. South Korea's 2/10-yield curve this week was briefly flatter than Japan's curve, which has had a pancake shape for years.