Fed’s dovish turn fuels bond bets for Korea rate cut
February 02 2019 11:44 PM
Lee: Playing
Lee: Playing down talk of an easing, noting that the Bank of Korea’s policy is already accommodative.


If bond traders are right, South Korea may be set to ease policy for the first time since 2016.
South Korean debt rallied for a second day on Friday, as traders bet the central bank will seize the chance to cut interest rates after the Federal Reserve signalled a prolonged pause in tightening.
Central bank governor Lee Ju-yeol did little to damp the speculation, saying the Fed was more dovish than expected and that its stance would impact policy in other markets.
Just last week, Lee had played down talk of an easing, noting that the Bank of Korea’s policy was already accommodative.
A second straight monthly drop in exports coupled with slower-than-expected inflation in January are also fuelling bets for a rate cut.
“Market expectations for BOK to lower benchmark rates have now grown back,” said Kim Sanghoon, a fixed-income strategist at KB Securities Ltd.
If the economy continues to slow, bets for an easing will accelerate and push yields below the benchmark rate of 1.75%, he said.
If the Bank of Korea does lower rates, it would be the first major Asian central bank to do so since Indonesia trimmed in September 2017. Since then, the region has embarked on a spree of hikes to curb capital outflows sparked by the Federal Reserve’s policy normalisation.
South Korea’s three-year government bond yield was steady at 1.81% on Friday after declining three basis points the day before, the biggest drop in a month. Ten-year notes dropped two basis points on Friday, adding to the six basis points decline on Thursday.
“This comes as the Fed signalled it may halt monetary tightening for some time while at the same time the BOK continues to gesture there won’t be any hikes throughout this year,” said Lee Young Hwa, an economist at Kyobo Securities Co in Seoul.
Like its regional peers, South Korea’s export-reliant economy is feeling the chill from the U.S.-China trade war.
President Moon Jae-in’s government has stepped up spending to try to offset the impact of slowing global demand and a weakening Chinese economy.

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