The Korea Herald

피터빈트

Expectation of rate cut grows as economic mood darkens

By Korea Herald

Published : Feb. 1, 2016 - 19:54

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Expectations that the Bank of Korea may soon lower the country’ key interest rate from the current record-low level are growing after Japan last week surprised global markets by adopting negative interest rates and weaker-than-expected export data strengthened the case for new stimulus.

“Foreigners are buying futures on Korean government bonds, betting on a rate cut,” said Seo Hyang-mi, fixed-income analyst at Hi Investment & Securities. 
Bank of Korea Gov. Lee Ju-yeol (Yonhap) Bank of Korea Gov. Lee Ju-yeol (Yonhap)

On Monday, yields on Korean government bonds plunged to new lows on speculation that the central bank will further slash the key interest rate to spark the domestic economy amid a global downturn. Fueling that was export data released Monday showing shipments from Korea fell 18.5 percent in January, the most since 2009, extending its losing streak to 13 straight months.

The yield on three-year treasury bonds fell 3.9 basis points to 1.52 percent, the lowest on record for a benchmark three-year note, Korea Exchange prices show. The 10-year note’s yield declined 5.7 basis points to an unprecedented 1.92 percent.

Korea’s key interest rate stands at 1.5 percent, the lowest on record and unchanged since June 2015. The BOK had slashed it by a cumulative 1 percentage point vie four rate cuts from August 2014. The central bank next meets on Feb. 16 to review the borrowing costs.

“The case for a rate cut has been strengthening as 2016 began with a series of financial market turmoil and the swearing in of a new economic team (led by Finance Minister Yoo Il-ho),” said Kim Ji-na, analyst at IBK Securities. “The Bank of Japan’s surprise move to lower its rate to below zero further bolsters it,” she said, predicting the BOK to deliver a rate cut in March.

Samsung Securities on Monday revised its outlook for interest rates in Korea, from no move until the end of 2016 to one rate cut in the first half of the year.

“We expect the reduction to happen as early as in February,” it said in a report, citing growing downside risks to Asia’s fourth-largest economy. The BOK would have to act to help spur domestic consumption in the face of darkening export outlook, it explained.

Expectations of further monetary loosening in Korea are also in line with recent moves by the central banks in the U.S. and Europe, as they strive to prop up the economy amid tumbling oil and commodity prices, wobbly financial markets and China’s economic cooling.

The European central bank said recently that it will further step up quantitative easing. Last week, the U.S. Federal Reserve, which increased fund rates from near zero in December, beginning its first tightening cycle in a decade, signaled the pace of its interest rate hikes may be slower than earlier predicted. 

By Lee Sun-young
(milaya@heraldcorp.com)