MPC Expected to Raise Key Rate by 25bp in Nov.
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
The Fed is facing the trilemma of balancing: 1) inflation; 2) financial stability; and 3) economic growth. The solution is to persuade the market that ‘bad is bad’ by easing financial regulations, adjusting the pace of rate hikes, and lowering its economic outlook. We expect 10yr TB yields to reach a high point in November.
Finding a solution to the Fed’s trilemma
The Fed faces the trilemma of balancing: 1) inflation, 2) financial stability, and 3) economic growth, amid rising concerns over tightening in the TB market, the benchmark for all asset markets. While financial stability is important, inflation expectations (BEI) have surged for all maturities amid rising expectations for a Fed pivot in October. However, we note that a premature pivot would be risky.
The Fed’s solution is likely to be a combination of: 1) easing financial regulations; and 2) adjusting the pace of rate hikes and downgrading its economic outlook. We expect to see an FF rate hike of 75bp in November and 50bp in December. If the Fed downgrades its economic outlook, and economic indicators come out negative, the market is likely to accept that ‘bad is bad’. Through this, expected inflation should stabilize.
With the theme of base rate hikes amid an economic downturn likely to become more prominent, 10yr TB yields are expected to form a high point in November.
MPC to adjust rate hike speed in November: Expect 25bp increase
Countries have been pulling out of the currency war since October. In particular, Canada and Australia have begun to adjust the pace of their rate hikes due to real estate and household debt problems, issues that are also apparent in Korea. With its rate hike cycle starting in Aug 2021, Korea’s key rate is already 55bp and 210bp higher than those of Canada and Australia, respectively. As the BOK also believes that there is room to control the speed of its rate hikes, we expect to see a 25bp rise at the November MPC meeting.