With the 655th rate-cut globally since Lehman, the Bank of Korea stunned the market tonight and cut rates 25bps to 1.25% (a record low). Only 1 of 18 economists expected a rate cut as it appears record highs in US equities signal nothing about the underlying turmoil in the world’s economy. After 6 straight days stronger (against the USD), the Won is sliding back above 1160 as it seems the currency wars are reigniting in AsiaPac…
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The 25bps cut, the first reduction since June 2015, shocked the market as only one BOK board member said at the May decision (according to the minutes) that there was a need to cut rates in near term.. which makes us wonder just what changed so quickly.
As Bloomberg reports, South Korea’s central bank unexpectedly cut the benchmark interest rate to a new record low as concerns rose that the government’s push to restructure indebted companies is putting pressure on the economy.
The decision to cut the seven-day repurchase rate to 1.25 percent was projected by only one of 18 economists in a Bloomberg survey. While Goldman Sachs Group Inc. was the sole forecaster predicting a cut at this meeting, Citigroup Inc., HSBC Holdings Plc, and Nomura Holdings Inc. were among those seeing a reduction in the next couple of months.
South Korea’s sovereign yield dropped to a record low this month after minutes of the May meeting showed a board member called for lower rates while the government and central bank announced plans to create a fund to facilitate corporate restructuring, boosting rate-cut bets as part of policy coordination. The board’s May minutes showed several members were worried about downside risks from the corporate overhaul such as unemployment and declining investment.
The market’s focus is on how many times the BOK will cut rates this year, Park Jong Youn, a fixed-income analyst for NH Investment & Securities Co., wrote in a report before the decision. Risks to the economy include unemployment from corporate restructuring, less fiscal spending due to front-loading in the first half of the year, and the anti-corruption law taking effect, according to Park, who expects two cuts in 2016.
The government and central bank said on Wednesday that they’ll create an 11 trillion won ($9.5 billion) fund to recapitalize policy banks and prepare for the potential financial market impact from corporate restructuring. Korean shipbuilders announced plans to sell assets and cut jobs to pare debt.
South Korea’s exports fell for a 17th consecutive month in May, although the pace of decline eased. Indicators of corporate activities such as investment ratios fell to post-financial crisis lows amid shipbuilders’ downsizing, while consumption held up.
The economy grew more than initially estimated in the first quarter, expanding by 0.5 percent from the previous three months. Household debt rose to a record high of 1,223.7 trillion won in the first quarter, central bank data show.
The three-year sovereign yield closed at an unprecedented 1.39 percent on Wednesday. The won gained 3 percent this month through Wednesday, erasing losses earlier this quarter, as expectations waned for a June rate increase by the Federal Reserve.
With inflation set to trail BOK’s 2 percent target for six straight months, Governor Lee will hold a press briefing in July to explain monetary policy measures to achieve the target. This accountability measure was one reason Goldman Sachs had predicted a cut at this meeting.
Now, who is next? Vietnam? Or does China come over the top with a big one?