Aug 20 2024: The Bank of Korea (BOK) is anticipated to maintain its key interest rate at 3.50% on Thursday, with a rate cut expected in the next quarter, following the likely start of U.S. Federal Reserve easing in September, according to a Reuters poll.
The BOK’s benchmark rate has been held at 3.50% since January 2023. In July, inflation rose to 2.6% from an 11-month low of 2.4% in June, moving further away from the central bank’s 2% target. The BOK may wait for more stable price trends before considering policy easing.
The Korean won, which has depreciated by over 3% against the U.S. dollar this year, is one of the worst-performing emerging market currencies in 2024. This currency weakness could deter the BOK from cutting rates ahead of the U.S. Federal Reserve, which is widely expected to implement its first rate cut in September.
A strong majority of economists—38 out of 40—in the August 13-19 poll forecast that the BOK would keep its base rate unchanged at 3.50% on August 22. The remaining two predicted a 25 basis point reduction to 3.25%.
Although two board members indicated in July that they were open to rate cuts, economists warned that such a move could exacerbate rising house prices in Seoul. This is a significant concern in a country where household debt to GDP is one of the highest globally, standing at 104.3% in the first quarter.
“The BOK will likely continue to signal a more dovish stance, but cautiously, due to persistent concerns about rising home prices and associated financial stability risks,” wrote Krystal Tan, economist at ANZ Bank.
“Our base case is that the BOK will begin its rate easing cycle in October, following a likely pivot by the Federal Reserve in September. The government is also set to tighten debt service ratio regulations from September, which should help manage household debt growth.”
Median forecasts from the poll showed no change in interest rates for this quarter but predicted a 25 basis point cut to 3.25% in the October-December quarter, consistent with the outlook from a July survey.
Of the economists who provided projections through the end of 2024, 27 forecast that the rate would be at 3.25%, while eight predicted a further decrease to 3.00%.
“We expect the BOK to cut rates in October, given that inflation is higher than anticipated, there is no urgency to cut as early as August. Additionally, house prices in Korea are currently quite elevated,” said Kelvin Lam, senior economist at Pantheon Macroeconomics.
The BOK has emphasized the importance of monitoring household debt growth and rising home prices before initiating rate cuts. House prices in Seoul saw their most significant increase in over four years in July.
Looking ahead to 2025, the BOK is expected to reduce rates by an additional 75 basis points, bringing the interest rate to 2.50% by the end of that year, according to the poll.
