Daily Management Review

South Korea's Move of Interest Rate Cut - Joined the League of Global Easing


03/13/2015


Worldwide Monetary easing indicates falling inflation rate.



South Korea joined other economies in global easing by its surprising step to cut interest rates. With South Korea joining the count, the number of central banks that adopted easing of monetary policy this year stepped up to 24.  Korea’s monetary policy, struggling with sluggish economic recovery growth, lowered its interest rate by 25 basis points to as low as 1.75%. The nation lowered its 2015 growth forecast to 3.4% in January as against its earlier estimation of 3.9% and it is expected that it will be further lowered in next month.

Moreover, India has already slashed its interest rates almost 2 times so far in 2015. China took similar steps to ease its monetary policy two times, with the anticipation of more moves in short run. Russia and Malaysia are the economies that are likely to join the list of central banks that have reduced their borrowing costs since start of 2015. This is mainly led by the fact that lower inflation calls the need to stimulate lackluster economic growth.

 The rate of inflation is sliding down drastically, real estate rates are higher and sluggish economy, all these factors together contribute towards interest rate cuts, and it is expected that this scenario will continue in the short run. As a result of crude oil price collapse since June 2014, many countries are witnessing low inflation rate. For instances, Spain’s CPI (Consumer Price Index) increased to 0.2% in February as compared to –1.6% a month before. Moreover, in Indonesia, the inflation rate plunged to 6.29 percent in February as compared to 6.96% in January. Basically, the global easing is led by declining inflation across different countries worldwide.

Similarly, Switzerland with the aim to boost spending, have reduced the rates of some of its deposits. In February 2015, Denmark’s central bank has also slashed its interest rates from -0.5% to -0.75% with the objective to keep its currency Krone pegged to Euro. Prior to that the Danish currency was pegged to German currency Mark for a long period of 35 years. Recently, Reserve Bank of Australia took the decision to reduce its cash rate for the first time in past 18 months, mainly led by currency wars.

Russian economy is witnessing first year of recession ever since 2009 as Western sanctions over the nation for intervention in Ukraine along with steep slide in crude oil prices is weighing on its economy. Russia being one of the largest crude oil producer is highly reliant on oil export revenues. Hence, the recent slight recovery in oil prices and weak Russian currency indicate towards the opportunity for central bank to revive the economic growth through interest rate cut. However, the situation of Russia is far more different than other countries that have slashed interest rates this year.

In contrast the US economy is expected to lift its interest rates is a clear indication about the fact that the economy is strengthening. Amidst worldwide economic slowdown, the robust US economy has resulted in remarkable shifting of global capital investments towards dollar denominated assets.







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