Clearer US September rate cut signals... South Korea likely in October, "One cut within the year"

Fed Emphasizes Dual Mandate of Inflation and Employment
Suggests Possible Rate Cut in September
Bank of Korea Likely to Cut Rates as Early as October or as Late as November

The U.S. Federal Reserve (Fed) has kept its benchmark interest rate unchanged for the eighth consecutive time and hinted at a possible rate cut in September, leading to expectations that the Bank of Korea (BOK) may also lower its benchmark rate as early as October or by November at the latest. However, due to concerns over household debt and a sharp rise in real estate prices, the market expects the BOK to cut rates only once within the year.

[Image source=Reuters Yonhap News]

On the 31st (local time), the Fed unanimously decided to keep the benchmark interest rate at 5.25?5.50% during the Federal Open Market Committee (FOMC) regular meeting. The market had largely anticipated this rate hold, and the key point of interest was how much the Fed would signal a rate cut in September.

In this statement, the FOMC emphasized its attention to both inflation and employment. Unlike the previous statement, which mentioned that "the Committee is highly attentive to inflation risks," the current statement was revised to say it is "attentive to risks related to the dual mandate (full employment and price stability)." This indicates a shift from focusing solely on upside inflation risks to also considering downside risks to employment.

Fed Chair Jerome Powell mentioned the possibility of a rate cut in September during the press conference held immediately after the rate decision. He said, "At the next meeting in September, a policy rate cut could be discussed," adding, "We are not yet at the appropriate time to cut rates, but we are getting closer."

He added that several preconditions must be met for a September rate cut. Powell stated, "If inflation slows, growth remains strong, and employment conditions persist as they are, a rate cut in September is possible," and that "the decision on rates will be made comprehensively considering economic outlook, inflation, labor market, and the balance of risks (inflation and employment)."

Accordingly, the market widely expects the Fed to lower the benchmark interest rate in September. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market on that day priced in a 100% probability that the Fed would cut rates by at least 0.25 percentage points in September.

South Korea Likely to Cut Rates as Early as October

If the U.S. cuts rates in September, South Korea is expected to follow with a rate cut as early as October. However, due to recent overheating in the housing market and growing concerns over household debt, the number of rate cuts is expected to be limited to just one within the year.

[Image source=Yonhap News]

The minutes of the Monetary Policy Board meeting (held on July 11) released by the BOK on the 30th reveal that board members unanimously expressed concerns about the housing market. One board member said, "The need to be cautious about the accumulation of financial imbalances such as rising housing prices and increasing household debt has grown." Another member stated, "We need to closely monitor future trends in inflation and housing prices when deciding the timing of rate cuts, and ensure that rate cuts do not exacerbate financial market instability by closely coordinating with macroprudential policies."

An Jae-kyun, a researcher at Shinhan Investment Corp., said, "As confirmed in the July Monetary Policy Board minutes, the possibility of South Korea cutting rates before the U.S. has significantly decreased due to concerns over household debt," adding, "Because of worries about household debt and the real estate market, rate cuts will likely be limited to October and only once within the year."

Joo Won, head of economic research at Hyundai Research Institute, said, "South Korea is expected to cut rates in October or November after the U.S. cuts rates in September," and added, "Since the Fed is expected to cut rates only once or twice within the year, South Korea’s rate cuts will likely be limited to one."

Kim Sung-soo, a researcher at Hanwha Investment & Securities, explained, "If rates are cut prematurely, household debt may increase, which could raise financial stability concerns," and said, "The number and timing of rate cuts will be limited to October and only once within the year."

Government: "Uncertainty Remains Over Timing and Magnitude of Rate Cuts in Major Countries... Will Thoroughly Manage Household Debt Risks"

Meanwhile, on the morning of the 1st, Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, held a macroeconomic and financial meeting with Lee Chang-yong, Governor of the BOK, Kim Byung-hwan, Chairman of the Financial Services Commission, and Lee Bok-hyun, Governor of the Financial Supervisory Service. He said, "The global financial market generally viewed the results of this meeting as accommodative and showed relative stability," but added, "However, uncertainty remains regarding the timing and magnitude of rate cuts in major countries, so we will respond with high vigilance under close cooperation among related agencies."

He also stated that risk factors such as household debt and real estate project financing (PF) will be thoroughly managed. He said, "We will implement the second phase of the stress Debt Service Ratio (DSR) as scheduled from September, and improve the interest rate calculation system for housing policy finance, which has recently shown rapid growth, within the scope that does not disrupt actual demand."

Yoo Sang-dae, Deputy Governor of the BOK, held a market situation briefing that morning and said, "Today, the Fed hinted at a possible shift in monetary policy stance, but uncertainty remains regarding the timing and magnitude, and monetary policies of major countries are expected to become more differentiated depending on each country's inflation and economic conditions," adding, "Despite changes in domestic and international financial conditions, financial stability risks such as rising housing prices centered in the metropolitan area, increasing household debt, and expanded volatility in the foreign exchange market persist, so we will continue to closely monitor these."

He continued, "In particular, with recent heightened geopolitical risks in the Middle East and increased uncertainty related to the U.S. presidential election, we will pay close attention to the possibility of increased volatility in major price variables and strengthen market monitoring."

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