The Bank of Korea has quashed swap traders’ hopes for an interest-rate cut. But analysts say an easing is inevitable.
(Bloomberg) — The Bank of Korea has quashed swap traders’ hopes for an interest-rate cut. But analysts say an easing is inevitable.
Traders erased wagers for a 10-basis point rate reduction in six months after BOK Governor Rhee Chang-yong said Tuesday that market expectations for lower borrowing costs are “excessive.” In contrast, strategists at Barclays Plc and Sangsangin Investment & Securities Co. still see a cut in the longer term.
The pushback from BOK echoes a similar trend in other markets, where traders increasingly see interest rates declining as economies weaken while central banks are still focused on bringing inflation down. Shinhan Asset Management Co. earlier said weakness in Korea’s crucial chip sector will drive a slowdown and a rate cut in the fourth quarter.
“Markets are normalizing now” after Rhee “scolded” players for focusing too much on the prospects for a rate cut, said Shin Earl, head of fixed-income strategy at Sangsangin Investment. But yields are likely to fall again in the long run as weakening growth revives rate-cut bets after summer, he said.
Barclays is maintaining its forecast for a fourth-quarter rate reduction from the BOK.
“We expect the underlying inflationary gauges to trend lower into year-end,” Bum Ki Son, an economist at Barclays, wrote in a note. While BOK may not yet be at the stage to discuss rate reductions, its “next move under our baseline scenario would be rate cuts into the second half of the year as some of the uncertainties start easing,” he added.
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