Bank of Korea Governor Rhee Chang-yong speaks to the press after a rate decision on July 11, 2024 (Courtesy of News1)
The time is ripe to prepare an interest rate cut as consumer prices stay around South Korea’s target of 2%. But it remains uncertain when it would start lowering its base rate due to rising housing price, household debt growth and the softer Korean won, Bank of Korea (BOK) Governor Rhee Chang-young said on Thursday.
“Conditions are ripe to change lanes and prepare to change direction (for monetary policy) at an appropriate time,” he said.
It is the first time for the central bank to officially give a mention of a rate cut in almost three years after it switched to a tightening stance with an interest rate hike in August 2021.
His remarks came after the central bank unanimously decided to keep interest rates unchanged at 3.50% for an 18th month in a row, the longest streak of standing pat on the interest rates since a 25-basis-point (bp) hike in January of last year.
“Two out of six members (on the Monetary Policy Board), excluding me, are of the opinion that we should leave open the possibility of lowering the base interest rate within the next three months.”
The other four expressed opinions to leave rates at 3.5% for the next three months, Rhee added.
FINANCIAL STABILITY
The BOK is now taking more consideration of financial market stability over inflation in determining the timing of its first rate cut in four years.
“Although much progress has been made in stabilizing inflation, there is a need to further monitor the foreign exchange market, housing price rise and household debt growth,” Rhee noted.
Apartment buildings in Seoul
South Korea’s headline consumer prices stayed at 2.4% in June, near the BOK’s target of 2%. But housing prices in Seoul Metropolitan Area rose at a sharper pace than the BOK had forecast in May. Rhee said the central bank took the faster-than-expected rise in home prices more seriously than it did in May.
Its seven rate-setting committee members shared the view that excessive liquidity supply or sending a wrong signal of a rate cut timing could trigger housing price increases.
“A majority of monetary policy board members believe the current market expectations for a rate cut are overdone, considering the current prices and financial market conditions,” said the governor.
Thee yield on three-year treasury bonds fell to 3.1%, pricing in one rate cut within the year. The Korean won opened domestic trade at 1,381.9 against the dollar, versus Wednesday’s close of 1,384,7.
Changes in the Bank of Korea’s policy interest rate
(Unit: %)
In March 2020, the BOK shifted to monetary easing policy by slashing interest rates by 50 bps following the COVID-19 onset. In August 2021, it turned dovish and has since lifted interest rates to 3.50% as of July this year.
In June, South Korea’s household debt added by 6 trillion won ($4.4 billion), taking its first-half debt growth to 20.5 trillion won, its biggest increase for a six-month period in three years.
The won opened domestic trade at 1,381.9 per dollar ahead of BOK’s rate decision on Thursday
In a survey of 20 economists conducted by The Korea Economic Daily on Wednesday, half of them predict the BOK will likely make its first rate cut in four years in October, in the wake of a rate cut by the US Federal Reserve around September.
However, Federal Reserve Chair Jerome Powell on Tuesday quashed hopes of an imminent rate cut. At a Senate Banking Committee hearing, Powell said that more good data could open the door to interest rate cuts, citing the cooling labor market and stubbornly high inflation.
Lee Seung-heon, a former deputy governor of BOK, said in the poll that the BOK is in no rush to lower interest rates, which could fuel housing price and household debt growth.
He had served as a Monetary Policy Board member until August of last year for three years before retirement. Lee bet on a rate cut in November, but said the timing could even be pushed back to next year.
By Jin-gyu Kang
joseph@hankyung.com
Yeonhee Kim edited this article
