Jump to content
House Price Crash Forum
Sign in to follow this  

Korea Says To Raise Rates Right Now Takes-Guts

Recommended Posts

The brave korean compared to BoE who continue to cause resources to be misallocated (including carry trade with no real economic sense). The longer they leave

it at 0.5%, the bigger bubble they will get and they will find that it is impossible to raise rate or fix a even bigger bust.


Korea: To raise rates right now ‘takes guts’

Posted by Gwen Robinson on Jul 09 08:30.

After all those lectures about stimulus measures and well-meant (for the most part) advice from western central bankers about exit strategies, Asia appears to be leading the way in removing monetary stimulus.

The Bank of Korea on Friday surprised markets and most economists by raising its benchmark rate a quarter-point to 2.25 per cent from a record low of 2 per cent for the first time in 16 consecutive months.

South Korea’s move – which boosted the won more than 1 per cent against the dollar – follows actions by India, Malaysia and Taiwan to lift rates in recent weeks.

As Bloomberg reports, an increase was forecast by just four of 14 economists it surveyed. But now, it seems, investors are already placing bets on another rate hike in coming months.

Acknowledging his surprise in a Friday note, Nomura economist Young Sun Kwon predicted further 25bp hikes in September and November, taking the terminal rate to 2.75 per cent at end-2010, above Nomura’s previous forecast of 2.50 per cent, and in 2011 a total of 75bp of hikes to bring the rate to 3.50 per cent.

The move is a nice kick-off for BoK governor Kim Choong Soo, a former Korean ambassador to the OECD who only took up his post in April. It follows his assessment that growth may surpass Korea’s trend rate.

Kim noted on Friday that South Korea’s economy grew more than 1 per cent in the second quarter from the previous three months, and had approached “its potential output level,” after which it may face demand-driven inflation pressure.

Nomura’s Young, meanwhile, said:

Regardless of the timing of this move, the fact remains that the policy interest rate still remains below CPI inflation, meaning the real policy rate is still negative; markets had largely expect higher interest rates in H2.

All in all, we believe that the impact of this rate hike on the real economy will not be large enough for us to change our GDP and CPI inflation forecasts. We expect real policy rates to stay negative until 2H 2011 given the BOK’s statements that an accommodative policy will be maintained for some time.

“This is the start of monetary-policy exit,” one analyst, Hwang In Seong of the Samsung Economic Research Institute, told Bloomberg, adding: “We may see another 25-basis-point rise in August and even more later this year. The governor showed confidence and declared a fight against inflation in a pre-emptive manner.”

Gavekal, the Hong Kong-based research house, sees Korea’s move as part of a broader global shift. As it said in a Friday client note (our emphasis and links):

The story of the 2002-08 boom was, at its core, a fairly simple one: the Western world piled on the financial leverage while Asia expanded its operational leverage. And as this went on, both sides of the world thrived. Since then, things have clearly changed. As [Thursday's] US consumer credit data highlighted, the West is now visibly in deleveraging mode… And of course, one question that investors are keen to answer is whether Asia can pick up the mantle of expanding financial leverage?

Right now this seems unlikely, if only because most Asian countries are doing something they have never done before, namely tightening monetary policy ahead of the OECD. This material change… was further confirmed in the past 24 hours with Malaysia expectedly raising interest rates and Korea surprising the market with a rate hike.

The new willingness on the part of Asian central bankers to tackle the their nascent inflationary problems is “good news”, according to Gavekal, which notes:

For a start, it shows a degree of confidence that Asian central bankers always seemed to lack before. Second, it shows that Asian policymakers believe the worst of the downturn is behind them; to raise rates in the face of weak US economic data and EMU sovereign risks takes guts.

Still, it warns, there are some important macro consequences behind this new hawkishness among Asian central bankers – not least the fact that, while OECD yield curves are steep and likely to remain so for now, Asian yield curves are flattening rapidly all across the board.

Such a divergence, notes Gavekal, “should logically have an impact on currency markets”. In other words, the differences in monetary policies between East and the West should ensure that Asian currencies remain well bid for the foreseeable future.

But it also means that most Asian indices will face some new headwinds – not least among financial sector and export-focused companies, which have relatively heavy representation in Asian indices.

Share this post

Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 401 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.