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Fed's prolonged pause opens door for Asia's central banks to cut

Hong Kong

THE Federal Reserve's abrupt policy shift has opened the door for interest rate cuts across Asia as inflation remains subdued and economic growth slows.

That's a stark contrast from as recently as four months ago when the prospect of further Fed hikes was pummelling the region's currencies and pressuring current account deficits.

Now, the focus across the region is shifting to domestic concerns as the primary driver of monetary policy. Central banks in Indonesia and the Philippines - among the most aggressive rate hikers last year - meet on Thursday and are expected to keep policy on hold. If anything, analysts are watching for any hint of a dovish turn.

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"The Fed's big shift will end the tightening wave for Asia's central banks and open the door for future easing," said Chua Hak Bin, an economist at Maybank Kim Eng Research in Singapore.

A currency rally is also helping. China's yuan has led gains among emerging Asian currencies this year, strengthening almost 3 per cent against the dollar and followed by the baht. That's a turn from 2018, where only the Thai currency rose.

Bangko Sentral ng Pilipinas is expected to keep its benchmark rate unchanged at 4.75 per cent when policymakers meet on Thursday. Newly appointed governor Benjamin Diokno's debut meeting will be watched for any hint he intends to begin reversing 175 basis points of hikes in 2018.

Bank Indonesia is also tipped to leave the key rate unchanged at 6 per cent on Thursday as investment banks including Goldman Sachs Group and Morgan Stanley point to cuts beginning as early as the second quarter of the year. Taiwan's central bank will also meet and is expected to maintain the benchmark rate at 1.375 per cent.

While China's economy is forecast to stabilise around mid-year, the rest of the region continues to feel its downdraft. South Korea's exports - a bellwether for global trade - fell 4.9 per cent from a year earlier during the first 20 days of the month, data on Thursday showed.

"With a dovish Fed, Asian central banks can now lower real rates," said Trinh Nguyen, senior economist at Natixis Asia Ltd.

The Fed's decision will also play out in developed economies, with central banks in the UK, Norway and Switzerland all meeting on Thursday. While rising oil prices are expected to spur a hike in Norway, both the Swiss National Bank and Bank of England are forecast to remain on hold. BLOOMBERG