Monday, June 1, 2020
Fixed Income Monthly: Interest Rate Cuts Inevitable
BOK Forecast to Cut Base Rate in April
Fixed Income Monthly: Interest Rate Cuts Inevitable
  • By Kang Seung-won
  • March 2, 2020, 21:55
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The author is an analyst of NH Investment & Securities. He can be reached at -- Ed.


Due to steep asset price adjustments, the US Fed has issued an emergency statement suggesting policy intervention. We expect to see: 1) a downward revisions to the US GDP growth forecast; and 2) a FF rate cut as early this month but no later than April. The BOK is forecast to cut its base rate in April, exerting flattening pressure on the yield curve.

US 10y TB yield plunge and Fed’s market intervention

With the US assets undergoing steep price adjustments, a recent emergency statement shows the Fed’s willingness to intervene. We expect the Fed to make an initial rate cut as early as this month but no later than April. When trimming down its federal funds (FF) rate, the Fed will also likely lower its growth forecast, resulting in a 0%p US GDP gap this year. Assuming such, we believe that: 1) the US TB market will demand additional FF rate cutting; and 2) US TB yields will trade in their lower range for now.

BOK delays rate cut; KTB yield curve to be under flattening pressure

Despite easing stances by major economies’ central banks, the BOK opted for a ‘hawkish’ rate freeze at the February MPC meeting. The rationale for such is that while the extent of the negative effects of the Covid-19 outbreak remains uncertain, risk pertaining to rising real estate imbalances are concrete. Of course, we cannot say for certain whether the outbreak will be prolonged or not, but we expect Korea’s GDP growth rate to clock at 1.6% this year. If so, this year’s GDP gap is to be -0.95%p, matching the level seen during the eurozone fiscal crisis of 2012 (0.91%p), the lowest point hit since the 2008 financial crisis. It will be difficult to maintain the key rate at its present level throughout the year, and we expect a base rate chop to be made in April. Against this backdrop, the KTB yield curve should face flattening pressure during March.

 Interest rate cut effects vs. deterioration in March economic indicators

Safe assets are currently facing price burdens due to a sharp drop in global interest yields in February. But, key rate cuts should lead to a rebound in long-term interest yields upon signs of economic improvement. Considering the recent sharp drop in Chinese economic indicators, it is unlikely that a one-time rate cut by the Fed will incite an upsurge in long-term interest yields.