Passage of Supplementary Budget on 17th, Key Dates Around FOMC on 17-18th (Local Time)
Experts Say "100bp Rate Cut Possible at US FOMC"
[Asia Economy Reporter Kim Eun-byeol] As the Bank of Korea hinted at the possibility of holding an emergency Monetary Policy Committee (MPC) meeting, there is growing speculation that it will hold an emergency MPC this week and cut interest rates. The likely timing for the rate cut is around the 17th, when the supplementary budget is expected to pass the National Assembly, and the 17th-18th (local time), when the U.S. Federal Reserve's Federal Open Market Committee (FOMC) meeting is held.
On the 13th, the Bank of Korea stated, "Discussions are currently underway among MPC members regarding the necessity of holding an emergency MPC." This officially suggested the possibility of convening an emergency MPC. Holding an emergency MPC implies an interest rate cut, indicating that the Bank of Korea has started seriously considering the possibility of lowering rates.
A Bank of Korea official said, "After the non-monetary policy direction MPC plenary session on the 12th, the MPC members held a consultation meeting to discuss the Bank of Korea's policy direction, including the possibility of holding an emergency MPC."
With the rapid global spread of the novel coronavirus infection (COVID-19), global stock markets have plummeted, and concerns about a severe impact on the real economy have intensified, leading to a recognition within the MPC that urgent action is necessary.
Notably, on the day the Bank of Korea hinted at the emergency MPC, Governor Lee Ju-yeol visited the Blue House and attended a special economic and financial situation review meeting on COVID-19 chaired by President Moon Jae-in. This was the first time Governor Lee attended an economic ministry meeting presided over by the president. Given the unusual attendance of the governor, it is widely believed that coordination between fiscal and monetary policies was discussed. This is why the timing of the supplementary budget's passage and the Bank of Korea's rate cut are expected to coincide. The supplementary budget bill is expected to be processed in the plenary session of the National Assembly on the 17th after passing the Budget Adjustment Subcommittee and the Special Committee on Budget and Accounts.
The FOMC rate decision, to be announced early morning on the 19th Korean time, is also a crucial factor. The market expects the Fed to cut rates by up to 100 basis points (bp) (1bp = 0.01 percentage points). The Fed's emergency rate cut on the 3rd effectively signaled a move toward 'zero (0) interest rates,' so it could increase the size of the cut at once. Currently, the Fed's benchmark interest rate is 1.00-1.25% per annum.
Michael Feroli, Chief U.S. Economist at JP Morgan, said, "Why save bullets in a situation like this?" and predicted that the Fed could cut rates even before the regular FOMC meeting. Michael Gapen, Chief Economist at Barclays, also forecast a 100bp cut in the benchmark rate at the FOMC meeting.
If the Fed cuts rates by 100bp, the Bank of Korea is also expected to implement a 'big cut' of more than 50bp. This is because it can expect market stabilization effects through global monetary policy coordination. However, the Bank of Korea's current benchmark rate is 1.25%, and cutting 50bp would immediately bring it into the 0% range, which is a burden for the Bank of Korea.
A bond market official said, "If the rate is cut by 50bp, it will enter the 0% range, so it is unlikely that the Bank of Korea will make a 'big cut' all at once," and added, "It seems likely that the Bank of Korea will cut rates by 25bp this time and then cut another 25bp at the April MPC." However, he added, "Since the bond market's expectations for a rate cut are high, the effect of a 25bp cut may be minimal."
The April MPC is scheduled to be held on the 9th of next month.
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