Central Bank Panic: South Korea and Thailand 'Unexpectedly' Cuts Interest Rates!

Political agenda will dictate on monetary policies. Incumbent political leaders would not want to see volatilities happen during their tenure, so they are likely to pressure monetary authorities to resort to actions that will kick the can down the road…

In short, authorities are likely to be concerned with short term developments. And political agenda will most likely revolve around popularity ratings and or the next election—or simply preserving or expanding political power.

Next, there is the social desirability bias factor. Monetary authorities won’t also want to be seen as “responsible” for a volatile environment. They don’t like to be subject to public lynching from market volatilities.

Third, there is the appeal to majority and path dependency. Since every central banker has been doing it and have long been doing it, they think that they might as well do it and blame external factors for any untoward outcomes…

Asian central bankers are likely to embrace the “sound banker” escape hatchet as propagated by their political economic icon—JM Keynes:

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.

South Korea’s central bank unexpectedly lowered its key interest rate to an all-time low to prevent the nation from falling into deflation and support economic growth.

The Bank of Korea lowered the seven-day repurchase rate to 1.75 percent, as forecast by two of 17 economists surveyed by Bloomberg. The rest predicted no change. The central bank lowered the rate by 50 basis points in two steps in 2014.

With South Korea’s inflation at slowest pace since 1999 and exports falling, the BOK joins more than 20 other central banks in loosening policy this year, including its Thai counterpart, which unexpectedly cut rates Wednesday. Governor Lee Ju Yeol told parliament on Feb. 23 that the central bank would probably have to respond through interest rates if the economic situation deteriorated.

Governor Lee said after holding the key interest rate on Feb. 17 that the “sharp increase” in household debt was one of the reasons for the decision. Government’s efforts to curb household debt could give more “leeway” for BOK to lower rates, according to Samsung Securities Co.

The Financial Services Commission said Feb. 26 that it planned to convert 20 trillion won of household debt this year to fixed-rate, amortized loans. Data released the same day showed South Korea’s household debt rose to a record 1,089 trillion won at the end of last year.

“A rate cut can lead to more household debt, and policy measures to reduce risks from higher debt offers room for monetary policy,” Stephen Lee, a Seoul-based economist at Samsung Securities, said before the decision.

The Bank of Thailand’s Monetary Policy Committee has decided to reduce the policy rate by 0.25 percent from 2.00 to 1.75 percent per annum with immediate effect.

Mr. Mathee Supapongse, Secretary of the Monetary Policy Committee, said that the decision was made on 11 March 2015 at a meeting of the committee, which voted 4 to 3 to reduce the policy rate. Three members voted to maintain the policy rate at 2.00 percent per annum.

He explained key considerations for policy deliberation, saying that in the fourth quarter of 2014 and January 2015, the Thai economy continued to recover slowly, as the economic momentum from private consumption and investment was softer than expected owing in part to weaker private sector’s confidence.

In the periods ahead, the economy is projected to recover at a slower pace than formerly assessed. Exports of goods are expected to recover at a rate close to the previous projection, but with higher downside risks from a slowdown in trading partners’ economies, notably China. Meanwhile, tourism is projected to recover steadily, partially offsetting the weaker domestic demand.

In the first two months of 2015, headline inflation declined and turned negative due to low global oil prices. Nonetheless, the prices of most goods and services continued to rise, reflected by positive core inflation. Looking ahead, inflationary pressure is forecasted to remain at a low level, close to the committee’s assessment at the last meeting. Overall financial stability remains sound, but there is a need to closely monitor the potential risk build-up associated with search-for-yield behavior, amid an extended period of low domestic interest rate environment.

“In the policy deliberation, the committee judged that the outlook of the Thai economic recovery is weaker than previously assessed. Fiscal stimulus will take time to materialize, while headline inflation is projected to remain low for a certain period of time. Against this backdrop, four members judged that monetary policy should be eased further to provide more support to economic recovery, and help shore up private sector’s confidence. Nevertheless, three members deemed the current policy rate as still being sufficiently supportive of economic recovery, while the policy space should be preserved as a shock absorber, to be used when more necessary and when policy transmission is more effective. Fiscal stimulus, especially the implementation of planned public investment, should be a key growth driver at this juncture.

“Going forward, the Monetary Policy Committee will closely monitor developments of the Thai economy, and will pursue appropriate policy to sustain the ongoing economic recovery, as well as to maintain financial stability in the long term.”