Global financial market at a turning point after the US ‘big cut’
China unexpectedly freezes… Japan and UK also maintain, Middle Eastern oil producing countries cut rates one after another
Central banks of each country ‘mixed choices’… NYT “Cooperation weakened compared to two years ago”
The U.S. Federal Reserve (Fed) lowered its benchmark interest rate for the first time in four years and six months, signaling the end of the tightening cycle, but central banks around the world are taking different paths and each is on its own path to survival. Immediately after the Fed implemented the ‘big cut’ (0.5 percentage point cut in the benchmark interest rate), oil-producing countries in the Middle East, such as Qatar and Saudi Arabia, lowered their interest rates one after another, but following the UK, Japan and China kept their benchmark interest rates fixed. They are taking a breather and watching the market.
On the 20th, the People’s Bank of China, the central bank of China, announced that it would maintain the 1-year LPR, which serves as the benchmark interest rate, at 3.35% and the 5-year LPR at 3.85%. In July of this year, the 1-year and 5-year LPR were lowered by 0.1% each, but were frozen for two consecutive months in August and September.
This is the result of avoiding market predictions that China would also lower its benchmark interest rate due to the Fed’s rate cut. Of the 39 experts surveyed by Reuters, 27 expected China to lower its LPR this month. The market is analyzing that China’s unexpected freeze is intended to prevent additional financial insolvency rather than to stimulate the economy immediately, and to block the possibility of foreign capital outflow due to the depreciation of the yuan.
On the same day, the Bank of Japan (BOJ), the central bank of Japan, also froze its benchmark interest rate at 0.25%. Japan raised interest rates for the first time in 17 years since 2007 in March, and four months later in July, it raised rates from 0-0.1% to 0.25%. Then, in early August, as the yen strengthened and stock prices plunged, causing financial markets to fluctuate, and concerns grew that Japanese companies’ export competitiveness would suffer, it is interpreted that they decided to wait and see whether to raise rates further. Bank of Japan Governor Kazuo Ueda said, “Real interest rates are still very low,” and “If the Bank of Japan’s outlook is realized, we will continue to raise the policy rate and adjust the degree of monetary easing accordingly.”
Initially, the market predicted that a full-scale rate cut would follow, starting with the U.S. rate cut. However, since each central bank is carrying different burdens, such as inflation and financial insolvency, their choices are also different. The New York Times (NYT) commented, “Compared to two years ago when central banks around the world aggressively raised interest rates together to fight inflation, there is less synchronization in this rate cut cycle.”
Meanwhile, as the Big Cut wind continues, major Asian stock markets rose on the 20th. Japan’s Nikkei Composite Index closed up 1.53%. Hong Kong’s Hang Seng Index (1.36%) and Taiwan’s Tiananmen Index (0.53%) also rose.
Middle Eastern oil producing countries drop rates, China, Japan, and the UK freeze rates, Korea hesitates… ‘Interest rate decoupling’
[美 금리 빅컷 이후] Central banks of each country ‘each for itself’
China, interest rates not falling despite economic slowdown… considering capital outflow and real estate crisis
Japan freezes rate hike in July after aftershock… UK cuts rate before US, ‘speed adjustment’
The central banks of major countries around the world have begun to take action in earnest in response to the ‘big cut’ (0.5% point cut in the base rate) by the U.S. Federal Reserve (Fed). Some countries have immediately followed the Fed and joined the ranks of lowering interest rates, while others have chosen to control the pace of inflation because it has not been completely contained, or, like Korea, have fallen into a dilemma due to debt and other issues despite the economic slowdown.
● Oil producing countries that followed right away, UK and Europe are adjusting their speedSome emerging countries and major Middle Eastern oil-producing countries followed the Fed and immediately lowered their interest rates. Indonesia, which anticipated the Fed’s pivot, lowered its benchmark interest rate by 0.25 percentage points to 6% on the 18th, the first time in 3 years and 7 months that it had lowered its interest rate. Major Middle Eastern oil-producing countries that adopted a fixed exchange rate system (dollar peg) that links their currencies to the US dollar also lowered their interest rates one after another. Qatar and Saudi Arabia lowered their rates by 0.55 percentage points and 0.50 percentage points, respectively, and the United Arab Emirates (UAE) also lowered its rates by 0.50 percentage points to 4.90%.
On the other hand, there are those who pivoted before the US but have recently started to adjust their speed. The Bank of England (BOE), which cut its benchmark interest rate by 0.25 percentage points in August, decided to maintain its benchmark interest rate at 5% per annum on the 19th (local time). After freezing the interest rate, BOE Governor Andrew Bailey said, “It is important to keep inflation low, so we must be careful not to cut too fast or too much.” Klaas Knott, governor of the Dutch central bank and a member of the European Central Bank (ECB) policy committee, which cut interest rates by 0.25 percentage points in June and September, said that there is room to continue easing monetary policy, but only on the premise that inflation slows down as expected.
The New York Times (NYT) reported, “With inflation slowing, price targets coming into view, and economic growth weakening, interest rate cuts have become a global trend,” adding, “Nevertheless, central banks are being cautious because they may face a backlash, such as a rebound in prices, if they ease rates too quickly.”
Japan, which experienced a sharp appreciation of the yen after the July rate hike, also froze its interest rate on the 20th. It was also cautious about the timing of additional rate hikes, seemingly concerned about market unrest. Bank of Japan Governor Kazuo Ueda said regarding the possibility of additional rate hikes this year, “We will not make a specific timeline” and “We will carefully judge whether the U.S. economy will have a soft landing or become more difficult.” This means that they will closely watch the U.S. Federal Reserve’s interest rate cuts in the future and respond accordingly.
● “We need to lower it considering the economic slowdown” China and Korea are caught in the crossfire
Despite the Fed’s big cut, there are cases where the pace is not kept up due to domestic economic conditions. The Wall Street Journal (WSJ) reported on China’s decision to freeze interest rates, saying, “As economic activity is weakening across the board, China has been emphasizing the need for additional easing to prevent it from falling into low growth and deflation (economic recession with falling prices) as the world’s second-largest economy,” and “It is surprising that the Chinese central bank has not wavered.”
There is an analysis that China’s unexpected freeze despite its economic slowdown is due to the depreciation of the yuan and the insolvency of the financial sector. They are concerned that if China lowers its benchmark interest rate and the interest rate gap between the US and China widens again, capital will flow out and the yuan will plummet again. In addition, with local governments shouldering a lot of debt due to the ongoing real estate market slump, the possibility of a financial system crisis due to additional interest rate cuts is also a burden.
Similarly, Korea is also tied up due to household debt and the sluggish real estate market. Both inside and outside the political circles, pressure is being raised to lower the Bank of Korea’s base rate after the Big Cut, but the Bank of Korea is remaining silent. The rapid increase in household loans has not yet clearly slowed down, and whether there will be a slowdown before the Monetary Policy Committee meeting on October 11 is a key issue.
Reporter Shin A-hyung [email protected]
Beijing = Correspondent Kim Chul-jung [email protected]
Reporter Hong Jeong-su [email protected]
2024-09-23 01:56:35