Which central bank will be the next to cut?

Vietnam became the first country in the region to start loosening policy when it lowered its refinancing rate at the end of March. We don’t think it will be long before other central banks in Asia start to cut rates, with the Bank of Korea set to be next, most likely at its meeting in August. The economy remains very subdued, with GDP figures published earlier this week showing growth of just 0.3% q/q (this followed a 0.4% contraction in Q4 of last year). The main driver of the recovery was a jump in automotive exports, which largely reflected an easing of supply side disruptions, and is unlikely to prove sustainable. In addition, there is mounting evidence that higher interest rates are weighing on demand – investment fell last quarter while private consumption was very weak. Meanwhile, inflationary pressures are continuing to ease, with the headline rate dropping to a 12-month low in March. We also expect an early cut in Taiwan. GDP figures due to be published on Friday are likely to confirm the economy remains very weak, and with inflation falling back sharply, we have a cut pencilled in for the CBC’s September meeting. Our forecasts for both countries are more dovish than what both the consensus and financial markets are expecting.