With the decline in food and fuel prices and the strengthening of Asian currencies against the US dollar, inflation across the Asian region has begun to slow down recently. According to data from Nomura Holdings economists, the year-on-year increase in the consumer price index (CPI) in Asia (excluding Japan) has slowed to about 1.5% (calculated by simple average), the lowest level since the first quarter of 2021.
Specific Developments
Thailand: The CPI dropped by 0.57% year-on-year in May, marking the second consecutive month of negative inflation. This is also the third consecutive month that Thailand’s inflation rate has been below the Bank of Thailand’s target range of 1.0% to 3.0%. The Office of Trade Policy and Strategy under Thailand’s Ministry of Trade and Industry has lowered its full-year inflation forecast from 0.3% to 1.3% previously to 0.0% to 1.0%.
Indonesia: The CPI inflation rate in May remained within the government’s target range of around 2.5%, with a fluctuation range of 1%.
The strengthening of local currencies against the US dollar has pushed down costs, contributing to the recent slowdown in inflation across the entire Asian region. This situation offers central bank governors in the region a rare opportunity to ease monetary policy, especially as the risks of US tariffs and related uncertainties continue to overshadow the economic outlook.
Potential for Rate Cuts
Chen Li noted that, considering factors such as tariff shocks and geopolitical uncertainties, some Asian countries—especially those in Southeast Asia that are more dependent on exports and tourism—might consider stimulating economic growth through interest rate cuts. The overall low inflation environment in Asia provides ample room for such rate cuts, potentially leading to a wave of rate cuts across the region.
However, she also pointed out that Thailand, for example, faces significant challenges. The Thai economy relies heavily on exports and tourism, and US tariffs and the slowdown in global demand will have a substantial impact. Meanwhile, domestic issues such as the slowdown in industrial growth and high household debt limit the effectiveness of interest rate cuts in boosting domestic demand. As a result, Thailand faces a relatively high risk of economic recession.
Weak Demand and Policy Uncertainty
The decline in CPI in Asian economies is highly correlated with weak demand, which is closely related to the high tariff policy of the United States. Zhang Yugui noted that whether Asia will enter a rate-cutting cycle is highly dependent on the policy direction of the Federal Reserve. Although the market predicts that the Federal Reserve is highly likely to cut interest rates before September, from the perspective of economic fundamentals and the Fed’s decision-making mechanism, this is not certain.
Zhang Yugui further stated that the economies of Singapore and Thailand are showing signs of recession, and there is indeed an option for interest rate cuts as a policy tool. However, in the current complex external environment, rate cuts are unlikely to have a significant boosting effect on the economy at the technical level.
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