The US Federal Reserve's decision to cut its benchmark rate by 50 basis points allows Asia-Pacific central banks to take some time before they pivot on their monetary policies.

The magnitude of the Fed's cut was a surprise, though it was closer to what global bond and equities markets had factored in. Among major central banks in the region, the Bank of Japan and the People's Bank of China (PBOC) are due to announce their rate decisions this week, and the Reserve Bank of Australia is due to review its monetary policy Sept. 24.

"The Federal Reserve has been a latecomer to the global easing cycle," UBS researchers wrote in a Sept. 19 note, adding that the European Central Bank has lowered rates, as have central banks in several other global economies such as Switzerland, the UK and Canada. "With evidence that inflation is coming under control, the Fed can now focus on supporting jobs and growth while curbing the possibility of a recession. We maintain our base case for 100 basis points of easing in 2024."

Bank Indonesia announced a 25-basis-point cut hours before the Fed decision, while the Reserve Bank of New Zealand was among the first in Asia-Pacific to slash rates with a 25 basis-point cut on Aug. 13.

APAC majors

Asia-Pacific central banks such as the PBOC and the Reserve Bank of India (RBI) may get more wriggle room following the Fed's cut. The Chinese central bank has stayed on an easing path as it seeks to support an economy dragged by the slowdown in the real estate sector.

The Fed decision gives the PBOC "more flexibility to cut its interest rates without concerns over the renminbi (Chinese yuan) depreciating at a faster pace," said Lorraine Tan, director of equity research (Asia) at Morningstar. "So, we could see more room for monetary policy in China."

The relatively muted market reaction to the Fed's pivot will allow the RBI to calibrate its moves based on local conditions when it reviews monetary policy in mid-October.

"The RBI is likely to maintain its wait-and-watch stance and focus on being 'actively disinflationary', with a first rate cut likely by December," said Madhavi Arora, lead economist at Indian brokerage Emkay Global. "A case for an early cut is still less likely, and we continue to see shallow cuts by both Fed and the RBI in this cycle."

In Australia, the market continues to ascribe to a December rate cut by the central bank, according to a Sept. 19 note from Westpac. "The key market debate remains around just how much of a lag the [Reserve Bank of Australia] will have versus Fed policy, with a growing consensus around it not being as long as previously expected," Westpac said.

Bank of Japan's path

The Fed's move, however, will likely complicate the path for the Bank of Japan, which started on a rate increase cycle in March. The Japanese central bank has raised rates twice this year as it seeks to normalize its monetary policy after eight years of negative interest rates. The Japanese central bank is expected to announce more rate increases, taking its benchmark to as high as 1.0% by mid-2025, economists said.

However, a faster pace of cuts by the Fed if the US economy slows would push the Japanese yen higher against the dollar. "That could slow down or push back the [Bank of Japan's] rate hikes," said Hideo Oshima, a senior economist at Japan Research Institute.