Bank of Korea Governor Signals Interest Rate Cut "Considering Reduction at Appropriate Time" (Comprehensive Report 2)

Lee Chang-yong, BOK Governor, Suggests Possible Base Rate Cut
Number of Monetary Policy Committee Members Supporting Rate Cut Forward Guidance Increases to Two
Exchange Rate and Household Debt Among Factors Influencing Rate Cut

Bank of Korea Governor Lee Chang-yong is speaking at the monetary policy direction press conference held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 11th. (Photo by Bank of Korea)

The Bank of Korea has hinted at the possibility of lowering the base interest rate in the future. However, it assessed that factors such as household debt and volatility in the foreign exchange market could delay the rate cut.

Lee Chang-yong, Governor of the Bank of Korea, said at a press conference held after maintaining the base rate at 3.50% per annum on the morning of the 11th, "In May, it was not a situation where the blinker was on, but rather a state of deliberation on whether to change lanes to prepare for a rate cut," adding, "Now, the situation has been created where we have changed lanes and are preparing to make a directional shift at an appropriate time."

The Bank of Korea's Monetary Policy Committee (MPC) has maintained the base interest rate at the current level for 12 consecutive times from February last year to this day. The 3.50% base rate has been in place for about 1 year, 6 months, and 28 days since January 13 of last year, marking the longest freeze period in history. The previous longest freeze period was 1 year, 5 months, and 21 days from June 9, 2016, to November 30, 2017.

In the monetary policy statement released after freezing the rate on this day, the MPC stated, "Future monetary policy will carefully examine the trade-offs among policy variables such as inflation slowdown trends, growth, and financial stability while sufficiently maintaining a tightening stance, and will review the timing of base rate cuts."

Lee Chang-yong, Governor of the Bank of Korea, is attending the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul on the 11th. Photo by Joint Press Corps

Two MPC Members Provide Forward Guidance for Base Rate Cut Within Next 3 Months

Governor Lee said at the press conference, "Two MPC members expressed opinions that the possibility of a base rate cut within the next three months should be kept open." In May, only one member had such an opinion in the forward guidance, but this month the number increased to two.

Governor Lee explained, "The two members believe that the atmosphere to discuss the possibility of a rate cut has been created because inflation has decreased." On the other hand, "Four members believe that although there has been significant progress in stabilizing inflation, it is necessary to further examine and confirm the impact of rate cut expectations on financial stability through the foreign exchange market, housing prices, and household debt."

Governor Lee evaluated the recent consumer price inflation rate, which has fallen to the mid-2% range, as "a positive change and a result consistent with expectations." This is interpreted as meaning that the situation to discuss a base rate cut has been prepared as inflation has decreased as expected.

However, he emphasized, "There are many risk factors coming from ahead, such as the foreign exchange market, real estate in the Seoul metropolitan area, and household debt," adding, "It may take considerable time to make a directional shift."

He particularly expressed concerns about real estate in the Seoul metropolitan area. Governor Lee said, "The issue of rising real estate prices in the Seoul metropolitan area has become more serious than in May," and "Rising real estate prices could exacerbate the household debt problem."

He added, "All MPC members agreed that the Bank of Korea should not make mistakes such as excessively supplying liquidity or sending wrong signals about the timing of rate cuts that could trigger housing price increases."

He also said that the market is reflecting the possibility of a base rate cut too far ahead. He said, "The current market expectations for a rate cut are somewhat excessive," and "It is undesirable that expectations for a rate cut have been priced in early, causing housing prices to rise."

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee meeting at the Bank of Korea in Jung-gu, Seoul on the 11th. Photo by Joint Press Corps

Household Debt and High Exchange Rate Hamper Base Rate Cut

The Bank of Korea's decision to maintain the base rate on this day is due to the renewed burden on the Korean economy from rising household debt and a high exchange rate. As apartment prices have been rising mainly in Seoul recently, mortgage loans have increased significantly, bringing the household debt issue back to the surface.

According to Bank of Korea statistics, the increase in mortgage loans in the banking sector in June was 6.3 trillion won, the largest in 10 months since August last year. The cumulative increase in mortgage loans in the first half of this year reached 26.5 trillion won, the largest in three years since the first half of 2021. As market expectations for a base rate cut grew, signs of housing prices rising again appeared, leading more people to buy homes even by borrowing.

Instability in the foreign exchange market also continues. As the expected timing of the U.S. Federal Reserve's rate cut has been pushed back, the won-dollar exchange rate hit 1,400 won intraday in April and remains in the 1,380 won range. It is very unusual for the won-dollar exchange rate to stay in the high 1,300 won range for such a long time despite the absence of an economic crisis.

In this situation, if the base rate is cut, the exchange rate could rise further and could become a factor that pushes up inflation, which has recently been stabilizing.

Heo Moon-jong, head of the Economic and Financial Market Research Office at Woori Financial Research Institute, evaluated, "Due to concerns about won depreciation, it is burdensome for the Bank of Korea to lower rates now," and "The rebound of the real estate market as household debt increases is also a risk factor."

If the U.S. Cuts Rates in September, We Are Expected to Cut in October

It is also a burden for the Bank of Korea to cut rates ahead of the U.S. Federal Reserve, which has not yet lowered its base rate.

Kang In-soo, professor of economics at Sookmyung Women's University, said, "Currently, the burden of cutting rates preemptively before the U.S. is significant," adding, "If the interest rate gap widens, there is a risk of capital outflow."

In the market, the prevailing view is that if the Fed cuts the base rate in September, Korea will also lower the base rate around October.

In a survey conducted last week by Asia Economy of 20 economic experts, 11 experts predicted that the Bank of Korea would cut the base rate in October. Experts pointed to the timing of the U.S. rate cut as the biggest variable for domestic monetary policy going forward.

Jo Young-moo, research fellow at LG Economic Research Institute, explained, "The biggest variable in the Bank of Korea's base rate decision is the timing of the U.S. rate cut," adding, "Considering the current unstable exchange rate and the interest rate gap with the U.S., it is difficult for us to cut the base rate before the U.S."

Jung Sung-tae, research fellow at Samsung Securities, also said, "Considering the current unstable foreign exchange market, we expect the U.S. to cut the base rate around September and Korea to cut rates around October."

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