The Bank of Korea's Monetary Policy Committee on the 17th... Emphasis on 'Interest Rate Freeze'

Semiconductor Market Recovery and Trade War Easing Expected to Keep Interest Rates Steady
Concerns Over Potential Capital Flow to Real Estate Market if Rates Cut
High Possibility of One Interest Rate Cut This Year

[Asia Economy Reporters Sim Nayoung and Kim Eunbyul] The Bank of Korea's first Monetary Policy Meeting of the year will be held on the 17th. The general consensus inside and outside the Bank of Korea is that the base interest rate is likely to remain unchanged this time. However, the future policy direction is expected to be gauged depending on how Governor Lee Ju-yeol assesses the 'current economic situation.'

◆ Semiconductor Economic Recovery as a Factor Preventing Additional Rate Cuts = One of the main reasons for the expectation that the Bank of Korea will keep rates steady is the recovery of the semiconductor industry. The market widely anticipates that the declining trend in major semiconductor prices will halt and turn upward in the first half of this year. Samsung Electronics already posted an operating profit of 7.1 trillion won in Q4 last year, exceeding market expectations. A Bank of Korea official stated, "The semiconductor industry, which plays a key role in determining Korea's economy, is showing signs of revival." This implies that the semiconductor industry's recovery will be one of the factors preventing further interest rate cuts.

Governor Lee Ju-yeol also said in a meeting with reporters right after the New Year's ceremony on the 2nd, "Last year, our economy faced real difficulties due to worsening external conditions. The US-China dispute shaved off 0.4 percentage points from our GDP, and semiconductor prices plummeted. These two factors had the greatest impact on our economy." He added, "Although it is difficult to precisely predict when the semiconductor market will rebound, there are signs of easing in the US-China trade dispute, and semiconductor prices are expected to rise around mid-year, so this year's economy should be better than last year's." As the analysis that this year's economy will improve compared to last year gains traction, there is growing weight to the view that there is no urgent need to lower interest rates.

[Image source=Yonhap News]

◆ Government's 'War on Real Estate Speculation' Resolve and Global Rate Freeze Trend Influence the Bank of Korea = The government's policy direction, which has introduced strong real estate loan regulations, is also an obstacle to the Bank of Korea lowering interest rates. According to the Bank of Korea's 'Financial Market Trends in December,' despite the December 16 real estate measures, housing mortgage loans at banks increased by 5.6 trillion won last month. This increase was about 700 billion won more than the 4.9 trillion won increase in November. The rise in demand for funds was due to active housing lease and sales transactions. The monthly increase in housing mortgage loans recorded the largest growth in over three years since November 2016, when it was 6.1 trillion won.

Since President Moon Jae-in took office, real estate measures have been issued every year, but the annual increase in household debt has shown no signs of slowing. Bank household loans increased by 58.9 trillion won in 2017, 60.8 trillion won in 2018, and 60.7 trillion won last year. In this situation, further interest rate cuts risk only accelerating household debt growth. A representative from a commercial bank pointed out, "Last year, the timing of the Bank of Korea's rate cuts coincided with the overheating of the real estate market in the second half, making it difficult for the Bank of Korea to implement additional rate cuts."

Globally, the trend of interest rate cuts has temporarily paused, which is another reason why the Bank of Korea is expected to keep rates steady this time. The US Federal Reserve (Fed) has already cut its base rate three times last year, and the market sees a low probability of further cuts this year. Sweden also abandoned its negative interest rate policy in December last year due to rising household debt, soaring real estate prices, instability in financial companies and pension funds, and economic downturn despite rate cuts. Governor Lee emphasized at the New Year's meeting that regarding Sweden's move, "(With) abundant liquidity from accommodative monetary policy, concerns about side effects are growing."

Expected Inflation Trend

◆ Possibility of One Rate Cut This Year is High... Historically Low Expected Inflation is Also a Concern = However, while the Bank of Korea may not lower rates soon, voices suggest that it may implement one rate cut sometime this year. Although external risks such as the anticipated US-China Phase One trade agreement are easing, the recovery of the real economy remains uncertain.

At the last Monetary Policy Board meeting last year, two members effectively expressed minority opinions that a rate cut was necessary due to concerns about inflation, which is another reason the market expects at least one rate cut this year. In fact, at the last meeting, Monetary Policy Board member Shin In-seok pointed out the lowered inflation rate and submitted a minority opinion for a rate cut. Although Monetary Policy Board member Cho Dong-chul did not submit a minority opinion, the minutes revealed that he indicated the need for a rate cut. This also reflects considerable concern about inflation within the Monetary Policy Board.

Park Jong-hoon, Senior Economist (Executive Director) at SC First Bank, predicted, "The Bank of Korea will find it difficult to ignore the historically low expected inflation. Therefore, the Bank of Korea may cut rates once around the second half of this year." According to the December Consumer Sentiment Survey, current expected inflation is 1.7%, below the Bank of Korea's inflation target of 2%. This is the lowest level ever. When inflation expectations decline, a vicious cycle is triggered that deepens economic slowdown, increasing concerns about deflation, where prices fall amid economic recession. Consumers' sentiment also weakens because they expect prices to drop further.

Member Shin, who submitted the minority opinion for a rate cut, also stated last year, "In an economy where the real neutral interest rate is falling, if expected inflation falls excessively low, monetary policy becomes ineffective, making it difficult to restore the economy to equilibrium through monetary policy when the economy temporarily falls into recession." He explained that monetary policy should be proactively implemented before expected inflation falls excessively low. The International Monetary Fund (IMF) also pointed out in a report last year that "Korea's expected inflation has entered a downward trend," and "the Bank of Korea should pursue accommodative monetary policy."

This content was produced with the assistance of AI translation services.