Asian central banks face tough year

ISTANBUL

Asian central banks faced a turbulent year in 2024, with China's People's Bank, Hong Kong's Monetary Authority, and South Korea's Bank of Korea embracing monetary easing, while Japan’s Bank of Japan (BoJ) raised interest rates for the first time in 17 years.

As global economies navigated shifting economic conditions, Asia's central banks responded with significant changes to their monetary policies throughout 2024, driven by the need to combat inflation and address regional economic pressures.

The People's Bank of China (PBoC) and the Bank of Korea both implemented two rounds of rate cuts, while Hong Kong’s de facto central bank, the Hong Kong Monetary Authority (HKMA), reduced rates three times.

Meanwhile, the BoJ, which had maintained ultra-low interest rates for years, shifted its policy, ending the year with two rate hikes.

PBoC slashes rates by 50 basis points in 2024

The PBoC lowered its one-year borrowing rate (MLF), the key policy rate, by 20 basis points in July and 30 basis points in September, reaching 2% by year’s end.

The MLF rate, which allows Chinese banks to access medium-term loans from the PBoC in exchange for securities, has been a key tool in the central bank's monetary policy.

Analysts noted that weak domestic demand and the ongoing challenges in China’s real estate sector were major factors prompting the PBoC's monetary easing throughout the year. The central bank closely monitored industrial sector data, which played a role in shaping its policy decisions.

In addition to the MLF rate cuts, the PBoC also reduced the one-year and five-year loan prime rates, key benchmark interest rates.

The National Interbank Fund Center cut the one-year loan rate by 10 basis points in July and 25 basis points in October, bringing the total reduction to 35 basis points. Meanwhile, the five-year loan rate was cut by 25 basis points in February, 10 basis points in July, and another 25 basis points in October, totaling 60 basis points.

The Loan Prime Rate (LPR), which is determined based on the borrowing rates reported by 18 banks in China, has served as the benchmark interest rate since 2019. The one-year LPR is used for corporate loans, while the five-year LPR serves as a benchmark for real estate loans.

Analysts pointed out that the real estate sector’s struggles, particularly low demand and falling housing prices, were central to the PBoC’s rapid cuts in the one-year loan rate.

Looking ahead, experts suggest that China’s monetary policy in 2025 could be influenced by the trade and economic strategies of the incoming US administration, which takes office on January 20. To strengthen domestic demand and respond to potential trade conflicts, the PBoC may continue loosening its policy.

Hong Kong follows the Fed’s dovish stance

Hong Kong's HKMA implemented a series of rate cuts in 2024, reducing its benchmark interest rate by 100 basis points to align with the US Federal Reserve’s rate easing.

Because Hong Kong’s currency is pegged to the US dollar, the HKMA adjusted its policy rates in tandem with the Fed. The first rate cut, a 50-basis-point reduction in September, marked the first change since March 2020. By December, the HKMA had lowered its benchmark rate to 4.75%, following the Fed’s rate cuts in November and December.

As the city’s de facto central bank, the HKMA’s monetary policies mirror those of the US Federal Reserve, reflecting Hong Kong's long-standing peg to the dollar.

South Korea cuts interest rates twice in 2024

The Bank of Korea made two interest rate cuts in 2024, bringing its policy rate down to 3%.

In October, the central bank lowered the rate by 25 basis points to 3.25%, marking the first rate reduction since 2020. A second cut came in November, unexpectedly lowering the rate to 3%.

“Export competitions with major countries are intensifying, and we also noted the uncertainties in the trade environment following Trump's election victory,” said South Korea's central bank governor, Rhee Chang-yong.

Japan shifts to a hawkish stance after 17 years

After years of maintaining a loose monetary policy, Japan’s Bank of Japan (BoJ) began tightening in 2024, raising interest rates for the first time since 2007.

In March, the BoJ raised its policy rate by 20 basis points, moving from -0.10% to 0.10%. Then, in a surprise move on July 31, the BoJ raised the policy rate by an additional 25 basis points to 0.35%.

This marked a dramatic shift for Japan, which had been the last major economy to hold on to negative interest rates following the global recession.

Analysts pointed out that the BoJ’s rate hikes caused increased selling in Japan's equity markets, which experienced their sharpest decline since 1987, following concerns over rising interest rates and recession risks in the US.

Additionally, the yen’s rapid appreciation triggered regional market volatility, as borrowing in yen became less attractive, amplifying the pressure on financial markets.

*Writing by Mucahithan Avcioglu