The US Federal Reserve’s decision to delay raising interest rates has opened a policy window for Taiwan and South Korea to cut borrowing costs as the risk of outflows drops.
Sovereign bonds from the two Asian economies rallied yesterday after the Fed refrained from raising borrowing costs, while signaling a move is still likely this year. Monetary tightening in the US would push up US Treasury yields, exacerbating outflows from developing nations. Taiwan and South Korea are both struggling with a slump in exports amid a slowdown in China, their biggest market.
“A delayed hike gives Asian central banks more room to support liquidity,” especially Taiwan and South Korea, Societe Generale SA Hong Kong-based head of Asia ex-Japan rates strategy Frances Cheung (張淑嫻) said. “Even if it’s not an explicit rate cut, they can at least maintain loose liquidity.”
The yield on Taiwan’s sovereign bonds due 2020 fell six basis points, the most for benchmark five-year notes in almost a year, to 0.82 percent as of 12:16pm in Taipei, according to Taipei Exchange prices.
The three-year yield in South Korea dropped five basis points, the biggest decline since May, to 1.64 percent, Korea Exchange prices showed.
Traders now see a 44 percent chance the Fed will raise rates by December, while 18 percent expect a move to come next month.
In Taiwan, where rate reviews are held quarterly, four of 21 economists surveyed by Bloomberg last month predicted a cut on Thursday next week, while four said the move would come in December. The rest saw no change.
Seven of 23 economists expect the Bank of Korea (BOK), which has monthly policy meetings, to lower its key rate by 25 basis points from a record-low 1.5 percent by year’s end, while the remainder forecast it will stay on hold.
The window for Taiwan to ease is this month, and that for South Korea is next month or November, BNP Paribas SA Hong Kong-based economist Mark Walton said before the Fed decision.
The Bank of Korea said that while it sees a gradual improvement in the economy, there are still uncertainties including China’s slowdown and instabilities in emerging markets, according to its policy statement this month.
“If the timing for Fed tightening policy is pushed back, any burden the Bank of Korea would have when they lower interest rates, including foreign-investor outflows, eases,” Daewoo Securities Co Seoul-based fixed-income analyst Yoon Yeo-sam said. “Government bond yields will head downwards amid bets for BOK easing.”
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