Settings

ⓕ font-size

  • -2
  • -1
  • 0
  • +1
  • +2

BOK unlikely to cut key rate before Q4, aligning with Fed decision

  • Facebook share button
  • Twitter share button
  • Kakao share button
  • Mail share button
  • Link share button
Bank of Korea (BOK) Governor Rhee Chang-yong speaks during a press meeting at the central bank in Seoul, May 23, to explain its decision to maintain the policy rate at 3.5 percent. Yonhap

Bank of Korea (BOK) Governor Rhee Chang-yong speaks during a press meeting at the central bank in Seoul, May 23, to explain its decision to maintain the policy rate at 3.5 percent. Yonhap

Both central banks exercise caution on premature rate cuts for price stability
By Lee Yeon-woo

With the U.S. Federal Reserve (Fed) maintaining a cautious stance on changing its monetary policy, the Bank of Korea (BOK) is expected to follow suit and delay a rate cut until at least the fourth quarter of this year, according to market watchers, Thursday.

Both the U.S. and Korea remain concerned that lowering policy rates prematurely during a phase of persistently high inflation could undermine overall price stability.

On Wednesday (local time), the Fed held a regular meeting of the Federal Open Market Committee (FOMC) and unanimously agreed to maintain the policy rate at 5.25 to 5.5 percent. It also significantly reduced this year's expected number of rate cuts from three to one.

This is the seventh time that the Fed held the rate steady since July of last year. The policy rate gap between Korea and the U.S. also remained at a historic high of 2 percentage points following the decision.

"Fed Chair Jerome Powell positively evaluated consumer price index results, but maintained a cautious stance, stating that he needs further confidence in stabilizing prices before cutting interest rates and that the tempo may be slower than what the market expects," said Park Jong-woo, deputy governor of the BOK, during the meeting at the central bank.

The BOK shares a similar outlook with the Fed regarding rate cuts.

"If we are forced to raise interest rates again due to inflation after prematurely shifting to a dovish stance, the policy costs at that time would be much higher," BOK Governor Rhee Chang-yong said during a speech on Wednesday celebrating the central bank's 74th anniversary.

"Therefore, it is crucial to patiently maintain the current tight monetary policy until we are confident that inflation will reach the target level of 2 percent," Rhee added.

Consumer prices in Korea have decreased from the 3 percent range in February and March to the upper 2 percent range in April and May.

However, concerns of upward pressure on consumer prices are unavoidable due to persistently high international oil prices and the weak Korean won, which remains at 1,370 to 1,380 won per U.S. dollar.

Experts also believe that both central banks will not rush to cut rates.

The widely-held scenario is that the Fed will lower the benchmark rate once or twice from September at the earliest, while the BOK may lower the rate once in the fourth quarter and delay any further reductions until next year.

Electronic signboards at KB Kookmin Bank in Seoul show the benchmark KOSPI closing at 2,754.89, Wednesday, up 0.98 percent from the previous session. The Korean currency closed at 1,373.9 won against the U.S. dollar, down by 2.3 won. Newsis

Electronic signboards at KB Kookmin Bank in Seoul show the benchmark KOSPI closing at 2,754.89, Wednesday, up 0.98 percent from the previous session. The Korean currency closed at 1,373.9 won against the U.S. dollar, down by 2.3 won. Newsis

Joo Won, director of the Hyundai Research Institute, expects the BOK to cut the benchmark rate in October or November, following the Fed's decision in September. He noted that a preemptive rate cut by Korea is unlikely due to the potential exodus of foreign capital and the won-dollar exchange rate.

"The BOK will be concerned that if Korea lowers interest rates before the U.S. does, the exchange rate, currently at 1,360 to 1,370 won, could become more volatile," Meritz Securities analyst Yoon Yeo-sam said. "As factors that could trigger financial instability, such as real estate project financing, are currently under control, the immediate need to lower rates has diminished."

Yoon also predicted that the Fed would implement a rate cut in September, followed by the BOK in October.

Following the rate freeze, the domestic financial market showed stable movements. The lower-than-anticipated U.S. consumer price index, which helped the New York stock market reach an all-time high, also positively influenced the domestic market.

The benchmark KOSPI closed at 2,754.89 on Wednesday, up 0.98 percent compared to the previous session. The Korean currency ended at 1,373.9 won against the dollar, down by 2.3 won.

Lee Yeon-woo yanu@koreatimes.co.kr


X
CLOSE

Top 10 Stories

go top LETTER