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

As I have been saying here global central banks appear to be in a state of panic for them to aggressively slash interest rates. And curiously too these rate cuts appear synchronized. 

I have been projecting central banks around the world to cut rates for the following reasons:

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.

In Asia, aside from India, Thailand and South Korea just confirmed these views.

Moments ago, the South Korean central bank, the Bank of Korea, just cut rates. 

From Bloomberg: (bold mine)

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.

Raging stocks in the face of economic situation deterioration that prompts for a monetary policy response via interest rate cuts?! This has been du jour reward-risk environment: parallel universes, bad news is good news.

Well that’s South Korea’s policy rate trend from tradingeconomics.com

And that’s South Korea’s statistical GDP annualized.

Note that BoK has been cutting rates even as statistical gdp continues with its downshift.

It’s basically doing the same thing all over again expecting different results.

And here is the kernel of the policy decision from the same article:

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.

Like anywhere else, the general idea of the present day dynamic of serial rate cuts have been to lessen the debt burden. At the same time while cost of servicing debt goes down, demand for debt may go up. So the unfortunate result for such engagement would be a “debt trap”.

That’s the US Dollar South Korean won based on Google Finance

Since the BoK has opted to subsidize the domestic debt, her choice would most likely extrapolate to an even weaker won, thereby shifting the vulnerability of her debt burden to overseas exposure.

All these actions are just signs of kick the proverbial can down the road. But the road has a dead end. 

Now the Bank of Thailand’s announcement: (bold mine)

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.”

This is Thailand’s official policy rate trend since 2011

Those rate cuts have done little to support even the statistical economy over the same period

What those actions have done has been to swell Thailand’s credit markets…

...as well as inflate the balance sheet of Thailand’s banks.

A lot of those loans appears to have been channeled into speculative activities

Housing prices have been on wild ride up! (The data above is from Global Property Guide as of May 2014)

Others have been channeled to stocks where like everywhere else, Thailand’s stock market via the SET has been sizzling…

Coming off the jitters from October lows, the Thai SET appears to be inflecting again. 

And I believe that the decline in stocks which the BoT fears could amplify “part to weaker private sector’s confidence” could be a reason for last night’s divisive decision to cut rates in support of the speculative markets.

Yet subsidizing domestic debt will mean a weaker baht (USD-THB), which again like in South Korea’s dilemma will mean placing bigger weight on foreign debt exposures.

It’s odd how the BoT can claim “financial stability remains sound,” when they are in fact major force behind the “potential risk build-up associated with search-for-yield behavior, amid an extended period of low domestic interest rate environment”

BoT’s statements echo the Philippine BSP

Meanwhile despite the BSP’s stance, which has been to keep at current levels, those reiterative deflation risk spiel by the BSP chief have most likely been meant to condition of the public to the eventual lowering of rates. 

The problem is that lowering rates need to be justified. And since everything has been a showbiz, the BSP has been in a predicament to look for one. The BSP chief has even lectured financial journalists on how to write their articles by focusing on deflation.

The BSP cannot be seen as upsetting the boom image.

Anyway, Thailand and South Korea’s rate cut marks the 21st and 22nd rate cuts for 2015 according to CBrates.com. That’s aside from all other non-interest rate easing channel.

At the end of the day, there is a price to pay for all these debts, and this has been why central banks have been in panic. Extend and pretend.