Korea Rate-Cut Bets Revived as Market Rout Spurs Global Easing

  • Bond rally pushes three-year yield below BOK benchmark rate
  • Only five of 24 economists see a rate reduction this quarter

South Korea’s markets are signaling an imminent interest-rate cut after Japan added to its unprecedented stimulus and the U.S. signaled a delay in monetary tightening.

The yield on three-year sovereign debt dropped below the Bank of Korea’s record-low policy rate of 1.5 percent and interest-rate forwards fell after a report showed January exports slumped the most since August 2009. While the Bank of Japan’s adoption of negative interest rates on Jan. 29 reinforced easing speculation, most economists expect the BOK to stay on hold on Tuesday and in 2016, after lowering its benchmark rate four times since August 2014.

Nomura Holdings Inc. sees a 40 percent chance of a cut this week, while Samsung Securities Co. this month scrapped its forecast for no change this year and now expects a reduction this quarter. Nineteen of 24 economists surveyed by Bloomberg predict the BOK will refrain from easing this quarter to stem the won’s decline. The currency has weakened 3.2 percent this year as global funds pulled $2.8 billion from Korean shares.

"The BOJ’s latest move may have implications for Korea, given that both countries are close competitors in many export sectors," said Arthur Lau, the Hong Kong-based co-head of emerging markets fixed-income at PineBridge Investments, which oversaw about $85 billion at the end of 2015. "With global demand remaining weak, the BOK will likely need additional accommodation. We believe the risk of a rate cut is higher now."

The following charts show investors are pricing in a rate-cut as early as Tuesday:

South Korean bonds rallied as exports slumped for the 13th straight month in January and foreigners pumped $909 million into relatively safer government debt this year through Feb. 11. The yield on notes maturing December 2018 has dropped 17 basis points in 2016 to 1.49 percent as of 11:11 a.m in Seoul, Korea Exchange prices show. It reached 1.45 percent a day earlier, the lowest on record for a benchmark three year note. The 10-year yield declined to an unprecedented 1.77 percent on Feb. 11 before climbing to 1.83 percent as of Monday.

"We now believe the BOK will cut the base rate once in the first half, possibly as early as February,” said James Huh, a Seoul-based economist at Samsung Securities, South Korea’s biggest brokerage by market value. “However, its seems more likely that at least one of seven board members will call for a cut this time, followed by March action."

The spread between three-month certificates of deposit and similar-term CD forward contracts was minus 26 basis points on Feb. 11, the widest since March 11 last year, data compiled by Bloomberg show. It was minus 23 on Monday and compares with the average of minus 19 seen the day before each of the past four rate cuts.

Nomura expects a reduction in June because the authority is likely to refrain from acting amid volatility in global financial markets, according to Young Sun Kwon, a Hong Kong-based senior economist at the Japanese brokerage. While Barclays Plc doesn’t rule out a rate cut on Tuesday, it believes the BOK is more likely to ease in March as more economic data becomes available.

“It’s a question of when they deliver rather than whether they deliver," said Wai Ho Leong, a senior regional economist at Barclays in Singapore. “The Fed is becoming more dovish, and so should the rest of us. The dovish tilt will rub off on all the central banks in the world. It’s already evident in the BOJ and the ECB. Why not the BOK?”

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