The Era of Moderate Inflation Approaches... "South Korea's Interest Rate Cuts Will Be Slower Than Expected"

Consumer Price Inflation Expected to Be in the Mid-2% Range This Year
BOK Inflation Target Exceeded 2%
US Interest Rate Cut Pace Likely Slower Than Market Expectations

As the era of moderate inflation is expected to prolong, there are forecasts that the Bank of Korea's base interest rate cuts will not be as swift as the market anticipates. Since the end of last year, market interest rates have rapidly declined and the stock market has surged significantly, indicating that market expectations may have gotten ahead, suggesting a possible adjustment in the near term.

According to the Bank of Korea's 2024 Monetary and Credit Policy Operation Direction released on the 4th, South Korea's consumer price inflation rate is projected to fall to the mid-2% range this year. This figure falls short of the Bank of Korea's price stability target of 2%. The Bank explained that the cumulative cost-push pressures from sustained high interest rates will cause the pace of inflation slowdown to be gradual.

In the market, there is growing anticipation that moderate inflation will persist longer than the Bank of Korea's forecast. The Hyundai Research Institute expects that despite the global inflation slowdown, the downward rigidity of prices will solidify the moderate inflation phenomenon, and it will take a considerable amount of time before the return of the previous low inflation era.

No Si-yeon, a senior researcher at Hyundai Research Institute, analyzed, "Due to deglobalization and climate change, the current moderate inflation level is likely to persist," adding, "Central banks of various countries are expected to maintain medium-level interest rates to respond to moderate inflation, and there is a possibility they may even consider revising their policy targets (2% inflation rate)."

In the United States, there are also forecasts that inflation may not be controlled as quickly as expected. Thomas Barkin, President of the Richmond Federal Reserve Bank, said in a speech on the 3rd (local time) after the release of the Federal Open Market Committee (FOMC) minutes, "The speed and timing of rate adjustments this year depend on inflation and economic outlook," and added, "Forecasting is difficult and conditions are always changing," tempering market expectations for rate cuts.

Former U.S. Treasury Secretary Lawrence Summers recently warned in an interview, "The market is significantly reflecting expectations of Federal Reserve monetary easing, underestimating inflation risks," and "There is a possibility that the recovery to the inflation target will be delayed more than expected, in which case the extent of the Fed's easing may fall short of expectations."

As the inflation trend is expected not to subside easily, forecasts are strengthening that the pace of base interest rate cuts will be slower than currently expected in both the U.S. and South Korea.

The market has already preemptively priced in expectations for rapid base rate cuts this year, with government bond yields falling and the stock market rising since last month. In particular, the current government bond yields have dropped to levels reflecting expectations of more than two base rate cuts within the year, raising concerns about increased market volatility.

Im Jae-kyun, a researcher at KB Securities, said, "As expectations for Fed rate cuts have been brought forward, expectations for Bank of Korea rate cuts have also been accelerated," but added, "Although South Korea's consumer prices are slowing, they remain above the target, and the increasing share of services, where price slowdown is slower due to changes in price weighting, is a risk factor for price stability in Korea."

He continued, "Interest rates may fall further due to the early-year effect and rate cut expectations amid market instability such as real estate project financing, but it is difficult to expect rates to decline without any rebound."

Ahn Jae-kyun, a researcher at Shinhan Investment Corp., said, "At the January Monetary Policy Committee meeting, the Bank of Korea is likely to respond lukewarmly to early rate cut expectations," and evaluated, "Although early rate cut expectations are excessive, the possibility of a rate cut within the next six months remains valid."

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