Rate cut only a matter of time
Rate cut only a matter of time
  • Korea IT Times (info@koreaittimes.com)
  • 승인 2013.05.06 22:45
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SEOUL, KOREA - Apr in review: Strong bond market despite an unexpected rate freeze As the Bank of Korea’s Monetary Policy Committee (MPC) at the Apr meeting surprisingly chose to hold the policy rate steady, Korea’s bond market entered a correction phase.

But the market soon turned to a bullish mood on aggressive buying by foreign investors despite the announcement of a supplemental budget and stronger-than-expected 1Q13 GDP results. Sluggish mining/manufacturing production and the MPC’s release of the Apr meeting minutes also sent a buy signal to investors. Finally, bond yields ended the month much weaker, mostly in the long-term segment.

Rate cut only a matter of time From an economic perspective, we expect the May MPC to trim its interest rate by 0.25%p. But as Governor Kim Choong-soo is explicitly against a cut, we cannot rule out the possibility that the bank will take more time to ease its monetary policy stance. Nevertheless, we take note of the fact that the central bank’s rate decision comes from consensus building rather than the governor's opinion alone. We forecast Korea’s GDP growth and inflation rate will continue to miss the bank’s estimates released in 2012. As such, there is unlikely to be a rationale that can maintain a majority of views advocating a rate freeze for much longer at upcoming MPC meetings. We expect a rate cut by Jun at the latest.

May outlook: Yield curve to flatten in boxed-range trading The bond market will likely trade in a boxed range with a flattening yield curve in ay. We expect the BoK to lower the key interest rate at the May MPC meeting. A problem is that with an uncertain rate cut in May, the three-year government bond yield is already 28bp below the policy rate. Considering bond yields are unlikely to fall or rise sharply, there is a good possibility that the yield curve will flatten. If the rate is cut, a bull flattening is expected on bond buying by long-term institutional investors. But if the rate is kept unchanged, a bear flattening is expected as the short-term segment will likely experience a slight pullback. Overall, yields should stay in a boxed range.

*Source: Korea Investment & Securities Co.

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