0.25% Point Rate Cut Expected in December Following November
Reversal of Benchmark Interest Rates Between Korea and Others Likely to Ease
Major overseas investment banks (IBs) have been surveyed to expect the U.S. Federal Reserve (Fed) to consecutively cut the benchmark interest rate in November and December. Reflecting the favorable U.S. economic conditions, the rate cut is expected to be limited to 0.25 percentage points each time. The Bank of Korea is likely to keep its benchmark interest rate unchanged this month, which is expected to ease the interest rate inversion between the two countries.
According to the 'Recent U.S. Economic Situation and Assessment' report by the Bank of Korea's New York office on the 6th, 9 out of 10 global IBs forecast that the Fed will cut the benchmark interest rate by 0.25 percentage points each in this month and next month. The survey targets include major IBs such as Goldman Sachs, Morgan Stanley, JP Morgan, Nomura, Citi, and Barclays.
All 10 surveyed institutions predicted that the Federal Open Market Committee (FOMC) meeting on the 7th will result in a 0.25 percentage point cut in the benchmark interest rate. If so, the upper bound of the U.S. benchmark interest rate will be 4.75%. Although still higher than South Korea's 3.25%, the interest rate gap will narrow somewhat. At next month's FOMC, 9 out of 10 institutions except Citi expect a 0.25 percentage point cut. Citi forecasts a 0.5 percentage point cut.
A Bank of Korea official said, "The U.S. economic indicators released last month generally appeared favorable, and the perception that the employment slump is a temporary phenomenon has grown, leading to expectations that the Fed's future benchmark interest rate cuts will be more gradual."
The Bank of Korea's New York office explained that IBs consider the end point of this rate cut cycle to be around "3.00~3.50%." They see room for a further 1.50 to 2.00 percentage point cut from the current 5.00%.
JP Morgan forecasts that the U.S. benchmark interest rate will fall to 3.00% by September next year, and TD Securities expects the same by the end of next year. Barclays anticipates a cut to 3.25% sometime next year, Bank of America (BOA) by the end of next year, Citi by June next year, and Wells Fargo in the fourth quarter of next year. Goldman Sachs projects a 3.50% final rate in the second quarter of next year, Morgan Stanley sometime next year, Nomura by the end of next year, and Deutsche Bank by September next year.
If the U.S. interest rate cuts proceed as IBs expect, the unusually prolonged interest rate inversion with South Korea will also ease. The interest rate inversion between Korea and the U.S. has continued for 29 months from July 2022 to this month, breaking the longest record every month. Experts believe that the Bank of Korea will cut rates more slowly than the U.S. because it raised rates relatively less, so the scope for rate cuts is also limited.
At the monetary policy direction decision meeting scheduled for the 28th of this month, many expect the Bank of Korea to keep the benchmark interest rate unchanged. In a report on the 4th, Woori Financial Research Institute forecasted, "Considering the easing inflationary pressure, the slowdown in household debt increase, concerns about economic slowdown, the need to review the effects of the October rate cut, and the recently heightened volatility in the foreign exchange market, the Bank of Korea will keep the benchmark interest rate unchanged."
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