Global Rate Cuts Unleashed: Will the Bank of Korea Follow the Fed’s Lead with a Major Interest Rate Slash
Global Central Banks to Follow US Federal Reserve’s Lead in Interest Rate Cuts
Easing concerns over weakening domestic currency, several countries, including India, South Africa, and Thailand, are expected to join in the reduction of interest rates. This move comes after the US Federal Reserve (Fed) made its first ‘pivot’ in four and a half years, lowering the base interest rate by 0.5 percentage points.
According to the Wall Street Journal (WSJ), countries that had been unable to jump into interest rate cuts due to concerns over currency devaluation will now be able to join in the interest rate cuts. Central banks in major advanced economies, including Europe, the UK, and Canada, have already taken preemptive action by lowering interest rates this year.
Some emerging countries, such as Mexico and Chile, have also lowered interest rates this year. However, other emerging countries, including Korea, have adopted a ‘wait-and-see mode’ due to concerns over currency devaluation and inflation. But the Fed’s “big cut” has changed the situation, giving other central banks a sense of reassurance that their currencies won’t depreciate again if they lower interest rates.
Jason Tooby, an economist at Capital Economics, said, “The Fed’s move to cut rates has given other central banks a sense of reassurance that their currencies won’t depreciate again if they do.” The JP Morgan Chase analyst team predicted that India will cut interest rates next month, followed by the Bank of Korea and the Bank of Thailand before the end of the year.
Indonesia has already cut its benchmark interest rate ahead of the Federal Open Market Committee (FOMC) statement. The South African central bank is also expected to cut interest rates ahead of its Monetary Policy Committee meeting. Major oil-producing countries that have adopted a fixed exchange rate system (dollar peg) have decided to lower interest rates one after another in line with the Fed.
However, not all countries are following the Fed’s lead. Brazil’s central bank decided to raise its benchmark interest rate by 0.25% to 10.75%, citing concerns over inflation and currency devaluation. Australia and Norway are also expected to maintain high interest rates for the time being until next year as inflation has not subsided.
The Bank of Japan (BOJ) is expected to take a breather by freezing interest rates at its upcoming meeting, conscious of criticism that it was the main culprit of the global stock market “Black Monday” in early August. The BOJ will also keep in mind the results of the Japanese Liberal Democratic Party presidential election, which is effectively a “prime ministerial election” on the 27th.
As countries emerge with different monetary policies, there are concerns that the market may face additional uncertainty. However, the Fed’s move to cut interest rates has given other central banks a sense of reassurance, and many are expected to follow suit in the coming months.