"Despite Slowing Inflation... Bank of Korea Unlikely to Cut Interest Rates Within the Year (Comprehensive)"

Uncertainty Over US Interest Rate Hikes and Concerns About Korean Household Debt

As expectations rise for the peak of global monetary policy, market attention is focusing on the timing of the Bank of Korea's interest rate cuts. This is because the consumer price inflation rate remained in the 2% range in July following June, easing the inflation burden, and the U.S. benchmark interest rate is widely believed to have effectively ended after last month's hike, lowering the possibility of further increases.

Experts foresee that amid lingering caution ahead of next month's U.S. Federal Open Market Committee (FOMC) meeting, the Bank of Korea will likely continue to be unable to either raise or lower interest rates in the second half of the year due to the recent surge in household loans and the potential financial crisis stemming from real estate project financing (PF).

On the morning of the 2nd, the Bank of Korea held a "Price Situation Review Meeting" in the 16th-floor conference room of its main building, chaired by Deputy Governor Kim Woong. The meeting assessed that "despite the impact of concentrated heavy rains, the July consumer price inflation rate continued its expected slowing trend due to base effects." The core inflation rate (excluding food and energy) was also evaluated to have maintained a gradual deceleration as the rise in personal service prices gradually narrowed.

Deputy Governor Kim Woong stated, "Although the July consumer price inflation rate remained in the 2% range following last month, it is expected to rise again from August and fluctuate around 3% until the end of the year." He added, "The core inflation rate is expected to slightly exceed the May forecast (annual 3.3%) but will show a gradual deceleration trend."

With the July consumer price inflation rate recording its lowest level in 25 months at 2.3%, easing the inflation burden, there are forecasts that the Bank of Korea will keep the base interest rate unchanged at the Monetary Policy Committee meeting scheduled for the 24th of this month. Park Seok-gil, an economist at JP Morgan, said, "We expect the Bank of Korea to maintain the base rate this month as well," adding, "The Bank will likely continue to provide preemptive guidance to keep rates steady at the current level while waiting for inflation to sufficiently settle at the target level." Although inflation has slowed, the possibility of a rebound remains, and concerns about growth and financial stability have not been resolved, so upward and downward factors are mixed, leading to the view that the Bank of Korea will maintain its current tightening stance for a considerable period."

"The situation of being unable to raise or lower interest rates will continue"

[Image source=Yonhap News]

Experts believe that despite the slowing inflation trend, the timing of the Bank of Korea's interest rate cuts may be somewhat delayed compared to initial market expectations. On the 27th of last month, the Bank of Korea expanded the scope of eligible collateral and reformed the loan system focusing on lowering loan interest rates and extending maturities, which indicates the Bank's considerable attention to financial stability. Kim Ji-man, a researcher at Samsung Securities, said, "Given that the Bank of Korea is establishing safeguards against financial instability and liquidity issues, the likelihood of additional rate hikes is low," adding, "However, since expectations for earlier rate cuts have also diminished due to reduced financial instability risks, interest rate cuts are likely possible in the first quarter of next year."

The recent surge in household debt also warns of the risks of premature rate cuts. According to the Bank of Korea, household loans from all deposit banks, which had been declining until March this year, increased for three consecutive months in April, May, and June. In particular, the increase in June reached 5.9 trillion won, the largest in one year and nine months since September 2021. The minutes of the July Monetary Policy Committee meeting, released the day before, also reflected concerns among committee members about the rise in household debt. One committee member stated, "Considering the possibility of further rate hikes by the U.S. Federal Reserve, the uncertainty in the pace of core inflation deceleration, and the need to curb household debt for future financial stability, we should maintain the tightening stance longer and consider additional hikes if necessary."

The current record-high 2 percentage point gap between Korean and U.S. interest rates is also a variable in monetary policy. If the Korea-U.S. interest rate gap widens further, the won-dollar exchange rate could rise again, and foreign capital outflows from stock and bond markets cannot be ruled out. Bank of Korea Governor Lee Chang-yong mentioned after the rate freeze on the 13th of last month, "There is still significant uncertainty about how many more rate hikes the U.S. Fed will make, and we need to observe how the foreign exchange market will respond."

Despite the recent slowing inflation trend, some opinions suggest that more time is needed to confirm a downward stabilization of underlying inflation. Ha Joon-kyung, a professor of economics at Hanyang University, said, "Although headline inflation is falling, the pressure for inflation to rise again exists due to a rebound in the real economy, making it difficult to guarantee a stable deceleration of inflation," adding, "U.S. inflation is also slowing but will take time to approach the target range of 2%, so both the U.S. and Korea are expected to maintain the current tightening stance through the second half of this year."

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