Kenya, Australia, Poland and now South Korea. The country, whose net exports represent nearly 60% of GDP, and which have been deeply impacted by the recent collapse in the Yen, finally threw in the towel overnight and cut the benchmark seven-day repurchase rate from 2.75% to 2.50%, as only 6 of 20 economists predicted. The reason the move was surprising is that just like China, which overnight reported CPI of 2.4% on expectations of 2.3%, the country still has pent up inflation concerns, however it appears that preserving economic growth and its export potential is more important to the country bordered by North Korea, than price stability. The result of this largely unexpected move is a strengthening in the Yen overnight, if only by some 30 pips in the USDJPY.
From Bloomberg [17]:
Governor Kim Choong Soo and his board lowered the benchmark seven-day repurchase rate to 2.5 percent from 2.75 percent, the central bank said in a statement in Seoul today. Six of 20 economists surveyed by Bloomberg News predicted the move while the remainder forecast no change. Kim supported a cut after opposing one last month.
As central banks around the world move to counter currency appreciation, the won’s 24 percent jump against the yen in six months is hampering South Korean exporters of autos and electronics and aiding their Japanese rivals. In Seoul, ruling New Frontier Party floor leader Lee Hahn Koo yesterday urged a “more active role” for the BOK, adding to political pressure that the central bank resisted last month.
“Japan’s policies must have played a very big role in today’s decision,” said Huh Kwan, a Seoul-based fixed-income trader at Korea Investment & Securities Co., one of South Korea’s 20 primary dealers. “The cut can be seen as action to ease a worsening impact on exports.” Governor Kim Choong Soo and his board lowered the benchmark seven-day repurchase rate to 2.5 percent from 2.75 percent, the central bank said in a statement in Seoul today. Six of 20 economists surveyed by Bloomberg News predicted the move while the remainder forecast no change. Kim supported a cut after opposing one last month.
Just as importantly, many more rate cuts are coming as the global currency war becomes truly global:
Central banks in India and Taiwan may follow with interest-rate cuts and the Philippines may reduce the rate it pays on special deposit accounts, Robert Prior-Wandesforde, an economist at Credit Suisse AG in Singapore, wrote in a note today.
While a reduction in Thailand “is not part of our central scenario, more dovish comments” from the central bank governor today “suggest it would be unwise to rule out a cut altogether,” Prior-Wandesforde said. The baht fell today for the first time this week as speculation mounts that the Bank of Thailand will lower borrowing costs to stem capital inflows.
The bottom line:
“What we’re seeing is another round of global easing from Japan to Europe and South Korea needs similar action,” Lee Sang Jae, a Seoul-based economist at Hyundai Securities Co., said before the announcement. “The rate cut will help the nation’s fight against a weak yen.” South Korea’s economy grew the most in two years in the first quarter as the government front-loaded spending. At the same time, industrial output fell 2.6 percent in March from the previous month, the biggest decline in a year.
Two things to point out as a conclusion: net trade is a zero sum game, and as so many have pointed out, if everyone eases, nobody eases. So while the broader population may be confused by QEasing, and mistake dilution for wealth creation, collapsing global trade has no such doubts. It is the decline in global demand that is the issue for exporting countries, not how low their currencies can plunge.
And second: the world once again engaging in a round of easing is indicative of even more economic slowdown, and certainly not a recovery.