CBC, BoK likely to push for further rate cuts, almost near to zero

The central banks of Taiwan and Korea are expected to administer further rate cuts in the near term, bringing the domestic rates near to zero, if inflation fails to improve. However, consumer prices are expected to decline further, if gross domestic product slowed. Negative real rates may not be a worry anymore as asset prices will come down and deleveraging would commence, DBS reported.

The economic disturbances in Korea and Taiwan have originated from the slowdown in global growth and contraction in global trade. Also, the Fed has showcased a tendency to delay rate hikes when downside risks in the overseas economies increased. However, in the event of a severe global downturn, the Fed could reverse course and lower rates, the report mentioned.

In addition, beyond a level of zero interest rates, extraordinary measures like outright asset purchases and negative rates would prove difficult to implement in Taiwan and Korea, since neither the KRW nor the TWD is a reserve currency, commonly used in global transactions.

Meanwhile, the central banks of both the countries have issued large amounts of certificates of deposits and/or bonds during the economic expansion cycles to sterilize their FX interventions. As opposed to purchasing assets from banks and other financial institutions, the CBC and the BoK could allow the short-term debt on their balance sheets to mature.

However, both the central banks would remain cautious on the after-effects of unconventional easing that might hurt investors’ confidence in the currency as well, besides, excessive capital outflows and disorderly exchange rate movements.