The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. — Ed.
Starting in October, US and non-US monetary policies began to diverge. Although it is premature to discuss a US hawkish peak out, the main hurdle has passed from a global perspective. Considering Australia, Canada, and Norway, Korea is expected to adjust its rate hike speed in November.
US uniqueness: US and non-US monetary policies diverge
At its November FOMC meeting, the Fed announced that it will review the effects of tightening. In line with market expectations, we view this as being a signal for adjusting pace to a 50bp hike at the December FOMC. At a press conference, however, the Fed also mentioned the possibility of raising the terminal rate to prevent the market from interpreting the likely 50bp hike as a signal of transition to easing. Through such moves, the Fed may succeed in its difficult mission of: 1) implying rate hikes; and 2) simultaneously controlling inflation expectations.
Since November, we have confirmed a differentiation of monetary strategies between the US and non-US DMs (Europe, the UK). In contrast to the US, which is emphasizing the possibility of a higher terminal rate and ramping up hawkishness, the ECB and BOE have stated both that ‘significant tightening has already been implemented’ and that ‘the actual terminal rate will be lower than the market’s expectation’. For reference, while CPI is higher in Europe than in the US, the portion of floating rate mortgages (Germany 10.5%, UK 4%, US 10.4%) is largely similar. It remains clear that the Fed’s commitment to strengthening hawkishness is attributed primarily to the economy.
Among EMs, some have already abandoned the rate-hike path, and even among DMs, economic differences between the US and others is resulting in monetary policy differentiation. We see this as being an important signal that the global reverse currency war may ease. Although it is premature to discuss a US hawkish peak out, the main hurdle has passed from a global perspective.
Floating rates strike back: Different countries, different choices
For those countries that have recently embraced some control in their pace of rate increase, the commonalities are large amounts of household debt and high portions of floating interest rate loans. Following Canada and Australia, Norway has also joined the pace-control group with a base rate hike of 25bps, surprising the market’s expectation of 50bps. The percentages of floating rate mortgages in Australia, Canada, and Norway are 88%, 51%, and 95%, respectively. And, household debt-to-GDP ratios stand at 118%, 106%, and 92.9%, respectively. Unlike the US, where the share of floating interest rate mortgages is only 10.4% and the ratio of household debt to GDP is only 77%, these countries had no choice but to preemptively adjust their pace of rate acceleration.
In relative terms, Korea’s household debt-to-GDP ratio is high at 105%. In addition, the portion of floating interest rate loans is 78% if including term housing loans, indicating that Korea will also need to consider easing off the gas. At the November MPC, we expect a 25bp increase.