[BOK Focus] Bank of Korea Suppresses Expectations for Early Interest Rate Cut

Concerns Over Inflation Spike Due to Premature Expectations
"Not a Period of Price Stability" Warning Report
Message Urging No Pressure on Government

Price Stability Plaque Displayed in the Lobby of the Bank of Korea.

"Historically, cases of failure to enter a price stabilization period were often due to negligence of the last mile risk." (Bank of Korea report on January 29, 'Analysis of Cases of Transition to Price Stabilization Period and Implications')

Recently, as expectations for an early interest rate cut by the U.S. Federal Reserve (Fed) persist and domestic inflation indicators decline, anticipation for a pivot within the year is growing. Meanwhile, the Bank of Korea (BOK) is making strenuous efforts to suppress such expectations.

According to the BOK's Consumer Sentiment Survey released this month, the expected inflation rate for January (consumers' forecast of the consumer price increase over the next year) fell by 0.2 percentage points from the previous month to 3.0%, marking a decline for two consecutive months. Coupled with expectations of a Fed rate cut, the consumer sentiment index rose for two consecutive months, surpassing 100 for the first time in five months.

From the BOK's perspective, the market's excessive expectations for a pivot reflected in these indicators are unwelcome. Premature market optimism could undermine the downward trend in inflation.

Since the end of last year, Governor Lee Chang-yong has emphasized the uncertainty of the 'last mile'?the final phase toward achieving the inflation target?and the BOK is focusing on calming the market that is moving ahead. Governor Lee himself has stressed that it is his personal opinion but mentioned that it is difficult to predict an interest rate cut for about six months.

At this juncture, the report released by the Monetary Policy Department on January 29 clearly reflects the BOK's concerns. The BOK warned against placing excessive significance on the downward stabilization of prices. The report stated, "Although inflation indicators in Korea are gradually declining, the last mile risk related to entering a price stabilization period remains," explaining that "there is a possibility of additional cost shocks due to the end of the fuel tax reduction or delayed public utility rate increases, and price adjustment momentum remains."

The report was submitted to the Monetary Policy Committee members before the January 13 monetary policy meeting and was typically used only for internal reference. However, following the governor's and committee members' policy to disclose reports deemed valuable for external communication, it was made public.

A BOK official explained, "Materials judged to be worth disclosing have often been released in the quarterly Monetary and Credit Policy Reports, but waiting until the next report (in March) might reduce the timeliness of the issue, so it was unusually released now."

Through this cautionary report, the BOK appears to be sending a message not only to the market but also to the government to refrain from pressuring for interest rate cuts. This is to prevent a repeat of the 'Paul Volcker mistake' in the U.S. in the 1980s, when premature rate cuts lost control of inflation. At that time, Fed Chairman Volcker, pressured ahead of elections, lowered rates, which led to a surge in inflation that required raising rates from the 9% range to 21.5% to regain control.

Professor Heo Jun-young of Sogang University’s Department of Economics explained, "The government is accelerating early fiscal spending in the first half of the year, largely intending to release as much as possible before the general election. If so, the BOK may face difficulties in controlling inflation in the first half for various reasons, and in the second half, domestic demand may worsen further, increasing pressure for rate cuts from various quarters." He added, "This can be seen as part of the BOK's 'defense master plan' against future pressure for interest rate cuts."

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