BOK Expected to Cut Rate in April
The author is an analyst of NH Investment & Securities. He can be reached at sw.kang@nhqv.com. -- Ed.
Oil prices have plunged amid fears towards a growing number of confirmed Covid-19 cases in US. On the heels of a recent emergency 50bp lowering, we expect the Fed to cut the FF rate by 25bp at the March FOMC, followed by a further 25bp chop at the April FOMC. Although the BOK remains hawkish, we believe that it will eventually join the current global monetary easing parade.
Once again, no feasible scenario exists without US Fed
The US Fed made a surprise rate cut of 50bp last Tuesday (local time). The bank had already signaled that a FF cut was in the cards via an unscheduled statement on Feb 28. But, instead of waiting until the regularly scheduled FOMC meeting (Mar 18), it opted for an emergency rate cut, drawing US TB 10y yields into 0% territory.
We see the reason for the emergency move as being that the FOMC does not want its key rate cut move to be interpreted as a ‘recession cut’ should the committee lower both the FF rate and its growth outlook at the March FOMC meeting.
At Jun 2019 FOMC meeting, at which time the Fed first signaled that a rate cut was in the works, there was a dispute over whether the cut should be characterized as an insurance-motivated move or recession-motivated move. At the time, the GDP gap suggested by the Fed was 0.2%p, but if the growth forecast is trimmed back by more than 0.1%p at the upcoming March FOMC, the GDP gap would enter negative territory. In the end, the combination of a FF rate decrease and a growth forecast drop would have carried the threat of sparking recessionary fears, a consequence that the Fed wants to avoid.
The problem in play is that despite the Fed’s preemptive cut, the US cannot be free from recession worries panicking amid a rising number of confirmed Covid-19 cases in the country and a plunge in crude oil prices. Thus, additional rate cuts appear inevitable. Of note, during the previous 7 cases of intermeeting cuts, additional chops to the FF rate were made (without exception) within 40 days thereafter. Given such, we expect an additional 25bp reduction at the March FOMC meeting, followed up by a further 25bp lowering at the April FOMC meeting.
Domestic economy needs more coordinated policy easing
Despite the monetary easing stance of major central banks, the BOK is sticking to its cautious stance. That said, deteriorating economic growth presents problem. Last week, the government announced a supplementary budget of W11.7tn, but with W3.2tn to be set aside for revenue adjustments, only W8.5tn of the total is to be for new spending. Moreover, W2.3tn out of this W8.5tn is being earmarked for disease prevention and treatment, a factor which will not help in propping up the economy.
With a base rate cut being necessary for policy coordination, we believe that it is inevitable that such a decrease will be made at the April MPC meeting. The US Fed’s aggressive path of rate cuts is to pull down the lower limit of the effective interest rate, a development which in turn will enable an additional cut by the BOK as early as May, or by 3Q20 at the latest. In the meantime, with flattening pressures to prevail, we advise investing in long-term KTBs.