Central Banks

The Race to Cut Rates: Look What Japan Started

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More easy money was unleashed in the global economy on Thursday after the Bank of Korea lowered interest rates, capping a week that's seen at least four major central banks slashing rates.

The South Korean central bank cut rates by 25 basis points to a record low of 2.75 percent. This coming after Reserve Bank of Australia's quarter point rate cut on Tuesday, and on the heels of similar cuts by the European Central Bank and India's central bank last week.

In a year that's supposed to be about rising interest rates as the global economy continues to recover from Europe's debt crisis and China's slowdown of yesteryear, monetary policy around the world seems to be moving in the opposite direction.

The change can be traced back to February, when the Bank of Japan shocked the world with radical monetary policies aimed at reflating the domestic economy.

(Read More: Was Australia Right to Cut Rates?)

"I think there's a big change in market perception here. At the beginning of the year, lots of clients were asking me about who's going to be the first to raise interest rates. And what have we seen since Mr. [Haruhiko] Kuroda [BOJ's governor] made his announcement on the 4th of April? We've had a significant increase in the amount of quantitative easing globally," said Adrian Mowat, chief emerging market and Asian equity strategist at JPMorgan Chase.

Indeed, more cuts are expected in the coming weeks and months. According to Robert Prior-Wandesforde, director of Asian economics research at Credit Suisse, markets can expect a rate cut from Taiwan's central bank next, and India looks set to slash rates by at least another 50 basis points before the year is out.

Some market watchers point to the pressure felt by authorities to weaken currencies to stay competitive. In South Korea's case, analysts say a strengthening won against the yen was part of the motivation to cut rates. Japan is South Korea's key competitor when it comes to exports.

(Read More: More Rate Cuts Coming, No Matter What RBI Says)

"I see today's [Thursday's] rate cut as a defense against the rising won. You could say that the Bank of Japan has jumped in to participate in the currency wars, " Kim Jong-Su was quoted in a Reuters report. The Korean won has strengthened nearly 15 percent against the yen since Japanese Prime Minister Shinzo Abe took office in December and launched his campaign for unlimited monetary easing.

According to Mowat, the currency pressure argument likely rings true for the Reserve Bank of Australia, which cut rates this week despite signs of a pickup in the economy. On Thursday, Australia's employment data showed a stunning 50,100 jobs were added to the economy in April, more than four times the forecast.

"We've had evidence of the Fed minutes that their QE could actually be larger rather than smaller. The ECB has cut interest rates; we've had rate cuts from the RBA and the Bank of Korea. So with what's going on in Japan, probably through the currency there is pressure of interest rates to come down," he said.

(Read More: Roubini: No Stock Bubble, but 'Huge' Crash Could Come Later)


For Prior-Wandesforde, the mistake would be for the "hot" economies in Southeast Asia to jump on the bandwagon for the wrong reasons.

"There's even a chance that one or two of the "hot" ASEAN markets could ease. We are looking for a further 50 basis points cuts from the Philippines and while another rate reduction in Thailand is not part of our central scenario, more dovish comments from the Governor of the Bank of Thailand today [Thursday] suggest it would unwise to rule out a cut altogether," he said.

Prior-Wandesforde is especially worried about Thailand, where household debt has been increasing at a 15-20 percent annual rate over the past three years.

(Read More: Flood of Easy Money Putting This Region at Risk)

"In our view, rate reductions in the ASEAN countries would be a mistake, making hot markets hotter," he said.

- By CNBC.com's Li Anne Wong; follow her on Twitter: @LiAnneCNBC