[Geumtongwi poll] ① "US interest rate peaks next month... Korea to cut rates around Q3 next year"

by Seo Sojeong

Published 27 Nov.2023 06:11(KST)

Updated 27 Nov.2023 15:03(KST)

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Survey of 21 Market and Economic Experts

[Geumtongwi poll] ① "US interest rate peaks next month... Korea to cut rates around Q3 next year"

The Bank of Korea is expected to keep the base interest rate steady at 3.5% for the '7th consecutive' time at the Monetary Policy Committee meeting scheduled for the 30th. With growing expectations that the U.S. rate hikes have ended and the Bank of Korea is also expected to hold the base rate at the current level in the final monetary policy meeting of the year in November, the prevailing view is that further rate hikes will be difficult for both Korea and the U.S.

The consumer price inflation rate in Korea for October exceeded expectations at 3.8%, reigniting inflation concerns. Price instability due to rising oil prices and a surge in household loans are factors pushing for a rate hike. However, given the sluggish economic recovery in Korea due to the impact of China's economic downturn and the significantly increased financial interest burden, the outlook leans toward difficulty in implementing additional rate hikes. Market attention is focused on how long the prolonged high interest rates in the U.S. will last, with the majority view being that Korea and the U.S. will begin cutting rates in the third quarter of next year.

The Bank of Korea will also release a revised economic outlook on the same day, with experts expecting upward revisions to the consumer price inflation forecasts for this year and next. This is due to increased volatility in international oil prices and rising agricultural product prices, which may delay the convergence to the inflation target (2%). While many opinions generally align with the Bank of Korea's growth forecasts of 1.4% for this year and 2.2% for next year, there are also considerable views that growth will be revised downward due to weak export recovery amid global economic slowdown, continued consumption sluggishness, and ongoing fiscal tightening.

November MPC Expected to Hold at 3.5% '100%'

On the 27th, Asia Economy conducted a survey of 21 analysts from domestic and international securities firms and economists from banks and economic research institutes. All respondents predicted that the Monetary Policy Committee will keep the base interest rate at 3.5% this month, following the same decision in October.

Gong Dong-rak, a researcher at Daishin Securities, said, "With consumer price inflation exceeding expectations at over 3%, vigilance against inflation will be maintained while reviewing domestic and international economic conditions. Since the U.S., which has led global monetary tightening, continues its stance aimed at controlling still-high inflation, Korea is also assessed to have no immediate incentive to change the base rate."

Heo Moon-jong, head of the Economic Research Institute at Woori Financial Group, explained, "Despite concerns about financial imbalances due to rising household debt, the Bank of Korea will hold the base rate considering the easing core inflation trend and downside risks to the economy. Additionally, the rationale for further tightening has weakened due to stable international oil prices compared to October and signs of slowing consumption."

"U.S. December FOMC Expected to Hold Rates... Final Rate Reached"

The overwhelming expectation that the U.S. Federal Open Market Committee (FOMC) will hold rates steady next month is a major factor reducing the need for additional rate hikes by the Bank of Korea. All 21 experts surveyed expect the U.S. FOMC to keep the base rate unchanged at 5.5% (upper bound) next month, with a prevailing perception that the final rate has essentially been reached.

Kim Ji-na, a researcher at Eugene Investment & Securities, said, "U.S. inflationary pressures are easing, and inflation is moving within the expected path. As mentioned at the November FOMC, long-term interest rate increases are exerting additional tightening effects, so the need for further tightening is not significant."

Ahn Jae-gyun, a researcher at Shinhan Investment Corp., added, "Although the U.S. economy continues on a favorable path, signals of cooling employment and a slowdown in wage growth have weakened the case for further rate hikes. The 10-year U.S. Treasury yield, which was around 5%, recently dropped to the mid-4.4% range but remains higher than in September, so tightening effects still persist."

"Korea’s Rate Cut Expected in Q3 Next Year... Possibly as Early as Q2"

Regarding the timing of Korea’s rate cuts, the majority (14 respondents) expect it to be in the third quarter of next year, followed by the second quarter (5 respondents). Considering that in the October MPC poll, 12 respondents expected Q3 and 8 expected Q2 next year, more experts have shifted to a later timing. Two respondents forecast that Korea’s rate cuts will only be possible in the fourth quarter of next year.

Kim Sun-tae, a researcher at KB Kookmin Bank, said, "Although domestic inflationary pressures are easing, phenomena such as repeated sharp rises in expected inflation and interest rates due to abundant liquidity may occur. The long-term downward trend of actual inflation is expected to proceed very slowly, and the MPC’s rate cuts will likely be possible from the second half of next year."

Regarding the timing of U.S. rate cuts, the majority (13 respondents) expect the third quarter of next year, followed by the second quarter (7 respondents). In last month’s MPC poll, responses were evenly split between Q2 (10 respondents) and Q3 (9 respondents), but this month’s results show more weight on Q3, reflecting expectations of prolonged high interest rates. The U.S. economy remains more resilient than expected, and inflation upside risks such as the Middle East conflict have not yet been resolved, so the tightening stance may continue for some time, potentially delaying the timing of rate cuts in both Korea and the U.S.

"Korea’s Rate Cut Timing Will Lag Behind the U.S."

Following last month, the majority opinion is that Korea’s rate cut timing will be somewhat later than that of the U.S. Cho Young-moo, a research fellow at LG Economic Research Institute, said, "The Bank of Korea finds it difficult to raise rates due to sluggish domestic economic recovery and financial market instability, but it is also hard to lower rates due to rapid household debt growth, widening Korea-U.S. rate differentials, and unresolved inflation concerns. If the current 2 percentage point gap between Korea and U.S. rates widens further, it could lead to financial and foreign exchange market instability, so Korea is expected to cut rates only after the U.S. does."

Oh Chang-seop, a researcher at Hyundai Motor Securities, said, "As Korea’s consumer prices gradually converge to the 2% target next year, conditions for rate cuts may be established earlier than in the U.S., but the won-dollar exchange rate is the biggest variable. If the major economies’ growth next year is weaker than expected, global recession concerns could greatly increase exchange rate volatility, deepening the MPC’s dilemma over the timing of rate cuts."