A sigh of relief was heard in the South Korean stock market on Thursday as investors here hold onto expectations that Korea could have another rate cut within the year after the US Federal Reserve decided to keep its fund rates at least until before December.
The news of a rate freeze at the current range of 0.25 percent to 0.50 percent by the Federal Open Market Meeting in Washington arrived in Seoul early Thursday, sending its benchmark securities index to near the 2,060 mark thanks to a buying spree by foreign investors. The Kospi closed at 2,049.70, up 0.67 percent from the previous day.
“The market could show relief rally for a while, but that is expected to be short-lived, since the Fed decision was pretty expected,“ said Oh Tae-dong, an analyst at NH Investment & Securities.
The FOMC’s September decision was one of the major concerns for investors here, which added to uncertainties in the market, since it is a key determinant to the Bank of Korea’s rate adjustment next month.
A US rate hike was expected to force the hand of BOK to hold its base rate at the current 1.25 percent a while longer based on its principle of keeping the rate above that of the key currency.
The BOK unexpectedly lowered its base rate from 1.5 percent to an all-time-low of 1.25 percent in June and has been freezing it for the third straight month, based on its judgment that the Fed wouldn’t raise its rate before September.
The likelihood of a Fed rate increase this month had been high until August, when a poorer than expected US job report made the FOMC more prudent for the time being.
Now that the possibility of a US rate hike is clearly ruled out, the Korean central bank has gained some room to consider making another cut in the base rate in October.
Some analysts maintain their views that the BOK would likely offer additional monetary easing in the coming months.
“We still hold on to the view that expectations for further monetary easing are unlikely to fade away completely capping the bond and swap yields as there are growing downside risks to both economic growth and inflation,” said Da-yeon Hong, a rates strategist at HSBC based in Seoul. “Risks for slower growth are still lingering with a possible downside impact on private consumption from anti-corruption laws, due to be implemented on Wednesday, as well as concerns over slowing exports, as a result of Hanjin Shipping filing for court receivership.”
However, the likelihood that BOK could keep the rate unchanged for the rest of the year remains considerable, too, due to a threatening growth of the country’s household debt.
Since the Fed made it clear it will have an increase within this year, it wouldn’t be easy for the BOK to push the lowest-ever base rate further down, which has been pointed to as a major cause of the debt growth.
Due to loosened financial regulations on the real estate market last year, monthly growth of household debt has been accelerating for the past one year, recording the sharpest in August. The aggregate volume of household debt is estimated to hit 1.3 quadrillion won by the end of this year.
BOK Gov. Lee Ju-yeol said that the fast increase in household debt was one of the reasons why it maintained its key base rate in September.
Mark Walton, an economist at BNP Paribas assessed that the Korean market has shown some signs of life in its recent industrial output, giving the BOK justification to keep the current policy.
“The signs of life seen in recent data are likely to lead the BOK to leave policy unchanged for the rest of 2016, but the mix of low growth and low-inflation will see easing resume next year,” he said.
At a meeting on macro economy and financial market conditions presided over by Vice Finance Minister Choi Sang-mok on Thursday, the government and financial authorities decided to step up monitoring on the local financial market and the household debt growth as well, assessing that investor appetites for risky assets could rise as uncertainties surrounding the Fed decision have been eased.
By Song Su-hyun (
song@heraldcorp.com)
