Divergent Monetary Policy Committee... One BOK MPC Member Mentions Need for Interest Rate Cut for the First Time

Lee Chang-yong "There Are Differences of Opinion Regarding Future Base Interest Rates"

Lee Chang-yong, Governor of the Bank of Korea, is speaking at the monetary policy direction press conference held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 24th. (Photo by Bank of Korea)

At the Monetary Policy Committee of the Bank of Korea, an opinion was raised that the possibility of lowering the base interest rate should be kept open. This is the first time that the need for a rate cut has been raised within the MPC, which had only mentioned the possibility of further rate hikes until now. It is interpreted as a sign of a 'pivot (policy shift)' beginning to emerge amid growing concerns about an economic recession.

Lee Chang-yong, Governor of the Bank of Korea, said at a press conference after the MPC's monetary policy direction meeting on the 19th, in response to a question about the MPC members' outlook on the interest rate level three months from now, "There were differing opinions regarding the future base interest rate," adding, "Among the six MPC members excluding myself, one member expressed the view that due to the high uncertainty of policy conditions, there should be flexibility to either raise or lower the base rate over the next three months."

He continued, "However, the other five members said that inflationary pressures have increased further and the timing for inflation to converge to the target level is likely to be delayed, so the need to strengthen the tightening stance has increased compared to the August monetary policy direction meeting, and therefore the possibility of additional rate hikes should be kept open."

Governor Lee said, "In particular, one of the five members added that proactive measures are needed to prevent further deterioration of household debt," and "So this time, opinions were divided 1 to 5."

Until now, MPC members have all shown a stance that the possibility of an additional rate hike from the current annual 3.5% to 3.75% three months later should be kept open. Even after the MPC meeting on August 24, Governor Lee said, "All six MPC members hold the view that the terminal rate could be raised to 3.75% for the time being," adding, "Since the focus is currently on the possibility of rate hikes, it is premature to discuss rate cuts."

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee plenary meeting held on the 19th at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

Therefore, it is somewhat unusual that one MPC member kept the possibility of a rate cut open at this MPC meeting. The Bank of Korea's MPC showed a hawkish (monetary tightening) stance in the monetary policy direction statement issued that day, stating, "The timing for inflation to converge to the Bank of Korea's target level is likely to be delayed more than initially expected. We will focus on price stability and maintain a tightening stance for a considerable period while assessing the need for additional hikes."

The divergence of opinions among MPC members this time appears to be due to the high uncertainty surrounding the economic outlook. A representative reason is the war between Israel and the Palestinian militant group Hamas. Governor Lee said, "It is difficult to predict what will happen regarding the Israel-Hamas situation," adding, "The next few weeks will be important, but it is hard to say which scenario is more appropriate as we need to see the results of U.S. President Joe Biden's visit to the Middle East."

If the war situation worsens and international oil prices rise further, inflationary instability could spread, strengthening central banks' tightening stance. Conversely, if the economic recession deepens, the need for rate cuts could increase. The MPC also explained that "uncertainty regarding the economic and inflation trends has increased," but "the global economy is expected to continue slowing growth."

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