A key theme for Asia’s economic outlook 2025 is whether the region’s central banks can successfully sustain the current cycle of rate cuts to restore economic momentum. Subdued domestic demand, potential disruptions to global trade, and limited room for fiscal stimulus all combine to make looser monetary policy an attractive option for policymakers.
But at the same time, the decision to further lower rates will be complicated by a challenging external environment. The outlook for USD is for the greenback to remain strong throughout the year. Furthermore, the US Federal Reserve has put its own rate cutting cycle on pause. The risk of widening interest rate differentials with the US constrains the scope for policy easing across Asia.
Economic outlook 2025: lower rates to come
Despite the complex backdrop, we expect most of Asia’s central banks to cut rates two or three times in 2025. The depth of the cuts will depend on the specific circumstances of each economy.
The Philippines is likely to deliver 75bps of cuts, adding to a cumulative 75bps reduction in the policy rate over the previous three meetings. Monetary policy in the Philippines is moving more independently from the Fed than its regional peers, as concerns over domestic growth and inflation considerations are taking precedence for the central bank.
We expect just a 25bps cut in Thailand, even though the outlook for the local economy is weak. Last year’s disbursement of THB145 billion (USD4.3 billion) failed to boost consumption, banks are cautious to lend, and the country’s heavy reliance on exports makes it vulnerable to disruptions in global trade.
Among the economies that are expected to keep rates steady is Malaysia, where robust growth will be accompanied by modest inflationary pressures. The economy is firing on all cylinders, which means that although exports may suffer in a world of growing protectionism, domestic demand and investment flows will be able to pick up the slack.
Assessing disruptions to trade
Throughout 2025, Asian economies will have to handle high levels of unpredictability in the trade outlook. Much of the uncertainty comes from US President Donald Trump’s threat to impose tariffs on a number of its major trade partners. In the weeks following his inauguration, Mr. Trump announced significant levies on imports from Canada and Mexico, only to halt the measures just ahead of their implementation.
Tariffs on Chinese imports, adding 10% to existing levies, will go ahead. And this could only be the beginning: during his campaign, Mr. Trump threatened to impose tariffs as high as 60% to all Chinese exports to the US.
Even economies not directly targeted by these measures may face lower export demand due to the tariffs. The trade barriers will have a ripple effect along entire supply chains, as US demand for Chinese goods weakens and Chinese producers reduce purchases of both foreign and domestic inputs.
The indirect exposure of Asian economies to US tariffs on Chinese goods can be assessed by looking at the value-added content of foreign inputs in Chinese exports to the US. By this measure, Taiwan, Malaysia, and Singapore are the most exposed.
But if the US imposes tariffs directly on a broader range of economies, the impact will be much greater for export-dependent economies like Taiwan, Vietnam, and South Korea, where exposure to US tariffs would be 9.7%, 9.6% and 6.2% of GDP respectively. Countries that have the most domestically focused economies – such as India and the Philippines – will be much less exposed.
It is worth bearing in mind that exposure does not necessarily equate to impact. The actual effects of the tariffs will depend on a range of factors that are difficult to forecast – including the level of costs pass through, the elasticity of demand for the affected goods, and the extent that supply chains could be modified to lessen the impact.
Economy in focus – India
With its GDP surging 8.2% in fiscal year 2024, India was one of the world’s fastest growing economies, and it is expected to continuing developing at an impressive pace this year, albeit with some moderation. The slowdown is due, in part, to weaker manufacturing activities, with new orders softening in recent months.
India’s growth story remains intact, as the country enjoys several structural drivers that will drive a rise in GDP over the long term. These include favourable demographics, improved governance, and high-value-added sectors contributing a larger share of economic activity.
Indian inflation is expected to edge lower in 2025, supported by adequate rainfall and a robust winter crop that will ease inflationary pressure from food prices. A trade war between the US and China could also have a disinflationary effect in India, as it could result in China redirecting cheaper exports to alternative countries.
India is going through a cyclical slowdown in its economy. However, public spending is forthcoming. The Indian government recently unveiled its FY2026 Budget, which is likely to boost consumption and investment.
The RBI delivered a 25bp policy rate cut in February. We expect two more rate cuts from the RBI this cycle, one in April and one in the second half. This would bring the policy rate down to 5.75% and ultimately lower the cost of capital for retail and corporates. Together, fiscal support and monetary stimulus should help maintain growth at 6.7% in FY26, we think.
Finding the right balance
Lowering inflation creates space for Asian central banks to further loosen monetary policy. But in many economies, that room is limited by developments in the US, which will keep the easing cycle shallow. Finding the right balance between domestic demands and external constraints will be essential for Asian economies to successfully navigate 2025.
Visit our Markets 360 page for more on economic outlook 2025.
BNP Paribas does not consider this content to be “Research” as defined under the MiFID II unbundling rules. If you are subject to inducement and unbundling rules, you should consider making your own assessment as to the characterisation of this content. Legal notice for marketing documents, referencing to whom this communication is directed.
