July 11 2024: South Korea’s central bank indicated it is preparing for potential interest rate cuts but requires more evidence to confidently assert that inflation is returning to its 2% target. This follows the Bank of Korea’s decision on Thursday to leave its key policy rate unchanged.
The Bank of Korea stated, “we will examine the timing of a rate cut,” in a policy statement after maintaining the benchmark interest rate at 3.50% for the 12th consecutive meeting. This decision was widely anticipated by all 40 economists surveyed by Reuters.
“Given the underlying uncertainties regarding the future path of inflation, however, it is necessary to further assess whether inflation will continue its slowing trend,” the statement added.
While the decision to keep rates steady was unanimous, two of the central bank’s seven board members indicated they might support a policy rate reduction within the next three months, according to Governor Rhee Chang-yong.
During a post-policy news conference, Governor Rhee expressed caution regarding the growing expectations for interest rate cuts.
“In terms of price stability alone, the mood is right to discuss interest rate cuts,” Rhee stated. However, he also noted that “market expectations (for rate cuts) do look excessive in some ways.”
Expectations for potential rate cuts by the BOK increased after June’s headline consumer price readings showed inflation slowing to an 11-month low of 2.4%, nearing the 2% target.
In a significant change, the BOK removed the phrase from its May statement that “upside risks to inflation forecasts have increased.”
Following the announcement, South Korea’s policy-sensitive three-year treasury bond futures fell 0.18 points to 105.230 as of 0321 GMT.
Asia’s fourth-largest economy is facing persistent inflation, and policymakers are waiting for sufficient evidence of cooling prices to start lowering borrowing costs from restrictive levels.
Policymakers are also concerned about a resurgence in mortgage loan growth, as South Korea has the highest household debt-to-GDP ratio among developed countries.
Analysts suggest that a weakening won, which is down about 7% this year against the dollar, could delay the timetable for interest rate cuts, despite increasing political pressure for early reductions.
“Looks like board members are now confident about achieving price stability, but assessed more attention should be paid to financial stability, given the bank’s dual mandate: price stability and financial stability,” said Ahn Jae-kyun, an analyst at Shinhan Securities.
“We might see dissenters in the bank’s next policy review (in August), it will be a way to show that policymakers thoroughly examined risks involved with rate cuts,” said Ahn, who expects the BOK to deliver a cut in the fourth quarter.
