Central Banks Diverge; Monetary policies are diverging in Asia-Moody's Analytics

Monetary policy meetings will be of key interest this week and are expected to show diverging trends as central banks respond to varying local economic conditions. The Bank of Thailand is expected to cut rates by 25 basis points to 2% to support the economy amid lingering political turmoil. Although protests appear to have ended and monetary policy can't solve the government's issues, political instability has taken a toll on economic growth and the BoT must act.

By contrast, the Reserve Bank of New Zealand is set to begin its tightening cycle and become the first central bank in the Asia-Pacific region to lift interest rates in 2014. The RBNZ is expected to hike rates by 25 basis points to 2.75% as it looks to offset increased inflation pressures from a strengthening recovery, led by construction and exports. Any other outcome would surprise market participants, as they have priced in a 98% chance of a rate hike on Thursday.

Central banks in Japan and South Korea are expected to keep the status quo. The BoJ will continue its unlimited quantitative easing program as it tries to achieve a 2% inflation goal. The BoK, meanwhile, is in a sweet spot as the economy is strengthening and inflation remains low, which allows it to sit comfortably on the sidelines. When new Governor Lee Ju Yeol takes over in April, the Bank of Korea will begin considering its exit from low interest rates.

Bank Indonesia eyes a period of stable monetary policy settings following rate hikes in 2013. The central bank will leave rates unchanged at 7.5% at its March meeting as financial stability has improved: The rupiah is recovering (up 7% in 2014 to be one of Asia's best performers), capital inflows have resumed, and the current account deficit has narrowed, which are all positive signs for investor sentiment and the wider economy.

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