South Korean brokerage Daishin Securities projected central banks in South Korea and elsewhere could tilt more toward aggressive monetary stimuli following the dovish comments from the European Central Bank chief, paving the way for a monetary easing trend.
Speaking at the ECB Forum in Portugal on Tuesday, ECB President Mario Draghi said that “in the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.” He added that the ECB can amend its forward guidance and that “further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools.”
The Daishin report said the pressure to cut rates has been ratcheted up in central banks around the world amid signs of loosening monetary policy from Europe and the United States. The U.S. central bank is widely expected to leave its key rates unchanged after a two-day policy meeting that ends Wednesday. But investors are betting on signals of a rate cut later this year to forestall the slowing U.S. economy amid rising trade tensions with China.
The succession of easing actions across the globe could drive down commercial lending rates and lead to increased volatility in the foreign exchange markets, the report projected.
Daishin Securities noted that in the case of South Korea, bond markets have already factored in a rate cut, with treasury yields hitting new annual lows. It warned that the Korean economy may have to brace for more market uncertainty, citing the Bank of Korea Governor Lee Ju-yeol’s decidedly dovish comments last week. Minutes from the May rate-setting meeting, which had ended in a no rate action, showed that two members out of the seven-member monetary policy board had also called for a rate cut, raising prospects for a policy change in the July or August meetings.
By Moon Il-ho and Kim Hyo-jin
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