Asia: Low Inflation is Here to Stay

Disinflation is underway in Asia, with inflation falling within central bank targets across most countries. Caught between US tariffs and China’s overcapacity, Nomura economists expect low-flation to persist in the region.

Headline CPI inflation has fallen to 2% y-o-y in January 2025 from a peak of 5.4% in September 2022, and core inflation to 1.9% from 3.8%, both calculated as a simple average across countries in Asia ex-Japan. We expect regional CPI inflation to ease further to 1.5% in July, before base effects kick in and lead inflation slightly higher to a still-benign 1.8% by end-2025.

Disinflation is broad-based across most Asian economies. Our estimates of trimmed mean and weighted median CPI suggest underlying inflation is below its long-term trend and below central bank targets, with lower core inflation momentum. Hong Kong, Singapore and India have the lowest underlying inflation pressures, and Singapore has experienced the sharpest fall in underlying inflation. Inflation prints were negative in both China and Indonesia in February. While Indonesia’s negative inflation is likely to be transient, we expect Thailand to join China, with its headline inflation likely to turn negative starting in May.

A normalization of food and energy prices, lower pipeline price pressures and the lagged impact of past policy tightening have all played a role, consistent with Nomura’s view stated in the 2025 Asia macro outlook.

Softer global demand and planned supply increases by OPEC+ should keep oil prices capped. The ongoing La Niña conditions, which are expected to persist in the near term, and with a likely transition to ENSO-neutral in March-May 2025, should keep food inflation at bay. The disinflationary impulse from China’s overcapacity means goods inflation is likely to be subdued. Meanwhile, the ongoing labor market rebalancing should enable faster services disinflation.

As US tariffs are implemented, the downside risks to growth and inflation will likely become more material. Subtracting our estimates of underlying inflation from the nominal policy rate across Asia ex-Japan economies shows that real policy rates are high and there is room to ease further.

Thailand: We expect 25 basis points rate cuts in each of June, October and December 2025 and February 2026, by the Bank of Thailand.

Singapore: In the Nomura FX strategy team’s base case, the Monetary Authority of Singapore eases FX policy in April, with another slight slope reduction to a 0.5% annualized rate from an estimated 1% currently. Direct tariffs on Singapore could prompt MAS to ease more aggressively by reducing the S$NEER slope to zero percent.

South Korea: Depending on how the political scenario evolves, the Bank of Korea could lower its policy rate by 50-75 basis points by end-2025 from the current 2.75%.

India: We expect 75 basis points of further rate cuts to a terminal rate of 5.50% by end-2025, with 25 basis points cuts in each of April, June and August.

Philippines: Has the second-highest real policy rate in the region, which suggests still-restrictive policy rates. We expect another 75 basis points of policy rate cuts, which would take the policy rate to 5.00% by end-2025.