South Korean Rates: Financial market stabilisation measures
South Korean authorities are rolling out a series of measures to stabilise the stock, bond and FX markets. Yesterday, the finance ministry announced a decision to buy back KRW2tn government bonds this week, the Bank of Korea said that it will conduct an outright KTB purchase worth KRW3tn, and the Financial Services Commission said it is preparing to activate the stock market stabilisation fund. Earlier last week, the BOK also took actions to contain the KRW’s rapid decline, such as stepping up the dollar selling/won buying interventions, requesting banks to report FX positions on hourly basis, and establishing a currency swap with the National Pension Service worth USD10bn.
These measures may help to alleviate the pressure in the stock, bond and FX markets to a moderate extent. Foreign net selling of Korean equities and bonds was sizable, amounting to KRW2.9tn and KRW2.6tn respectively during 1-27 September. Meanwhile, the cost of FX intervention was not small. Foreign reserves held by the BOK have shrunk by USD26.7bn (-5.8%) during the first eight months of this year – USD8.8bn if adjusted by the FX and income impacts.
To reverse the trend of surging yields, equity price declines and KRW depreciation, positive evidences need to be seen on the macro front, such as an improvement in South Korea’s growth outlook/trade balance, easing of inflation pressures, or a peaking of US interest rates. In this regard, the upcoming data release this and next week will likely remain discouraging. Exports growth is likely to have slowed further to just 3% YoY in September, while CPI inflation likely to have remained high at ~5.5% YoY.
The next major policy move is likely to be a further rate hike by the BOK at the 12 October meeting. The odds of an outsized 50bps rate increase are currently on the rise, given the KRW’s rapid decline and the mounting concerns about prolonged inflation pressures. Governor Rhee has said that he will provide new forward guidance at the October meeting. This could mean an upward revision of the terminal rate estimate, from 3% to 3.5-4.0%, matching the BOK’s longer-term inflation forecast for 2023 (3.7%).
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