| Bank of Korea (BOK) Governor Rhee Chang-yong bangs a gavel during a monetary policy board meeting at the BOK headquarters in central Seoul, July 13. |
Major economies expected to maintain credit-tightening longer than expected
By Kim Yoo-chul
The Bank of Korea (BOK) was one of the first to place its monetary tightening cycle on hold, leaving its key rate unchanged at 3.5 percent since February this year, increasing chances of a cut in the benchmark rate.
Regarding such speculation, the central bank said it was premature to start discussing rate cuts despite falling inflation. While inflation is currently above the bank's target, there are clear signs that it is decelerating. Mainstream economists have said the BOK is nearing the end of a rate-hiking cycle ― while others were betting that rate cuts could happen by as soon as the first quarter of 2024.
According to them, current discussions are more about whether additional rate increases might be necessary to make sure “disinflation” continues; or if doing so could cause “unexpected damage” to Asia's fourth-largest economy.
Despite falling inflation, the current macroeconomic situation is still uncertain with leading policymakers in the U.S. and EU asking central banks to remain “committed” to reducing inflation even if this risks below-than-expected growth.
| A currency trader talks on the phone in the foreign exchange dealing room at KEB Hana Bank's headquarters in Seoul, July 20. AP-Yonhap |
When it comes to increases in the key borrowing rate, several economists contacted by The Korea Times said they were still not sure “when enough would be enough,” but stressed the BOK would follow steps taken by central banks in advanced economies as it's very likely these will keep their rates higher for longer.
Upcoming 2024 election
While the BOK is independent, having full authority to make rate decisions alongside fiscal policy, the government is trying to affect the economy through its monetary policy, which helps it control the amount of money in circulation. Specifically in Korea, it's been regarded as the most ideal for “coordination” between monetary and fiscal policies.
Because the Yoon Suk Yeol administration and the ruling People Power Party (PPP) are tasked with better dealing with a slowing economy ahead of next year's general election, if the BOK increases its key lending rate, that could worsen “personal loans,” the riskiest segment of household debt. As of last month, the amount of such loans amounted to a record high of 1,062 trillion won.
“As it's too early to say asset prices such as real estate and equities are on track for a solid recovery, given the fact that the benchmark rate is the key driver of commercial mortgage rates, any extra hike by BOK could affect voter turnout. The presidential office and the ruling PPP are studying voters' attitudes toward the Yoon administration's real estate policy performance,” a two-time lawmaker of the party said.
The lawmaker added that the country's overall housing market isn't facing default risks as consumer sentiment has been improving since the first quarter of the year, however, there is regional polarization in mortgage conditions and housing transactions.
An improvement in President Yoon's approval rating could boost the prospects for his reform plans such as those for the labor market and pension system, both of which are considered as tough to deal with. According to local pollsters, Yoon's approval rating remained between 34 percent and 36 percent as of last week. More than 50 percent of those polled said they disliked his management of state affairs.
“Because Yoon's ambitious reform plans look challenging, the BOK won't raise its benchmark rate this year in order to prevent growing household liability, limit borrowers' repayment burden and get inflation under further control,” said Yoo Hye-mee, an economics professor at Seoul's Hanyang University.
While Korea has successfully recovered from the COVID-19 pandemic, rising commodities prices, energy bills and cost-of-living difficulties from broadening inflationary pressure have already made the public's economic concerns tangible. The BOK earlier assessed global inflation levels seem to have peaked despite seeing “stickiness” in core readings.
| U.S. President Joe Biden delivers remarks on healthcare coverage and the economy at the White House in Washington, D.C., July 7. Reuters-Yonhap |
Any factors affecting real estate policies have a greater impact on key elections here, because more than half of Koreans reside in Seoul and its surrounding area, and this has created huge demand for housing, while supplies remain limited.
“As hiking the benchmark rate has an impact across industries, the ruling party and the government would prefer to use various fiscal measures such as reducing government expenditure, while establishing tariff-rate quotas on major consumer products and limiting increases in energy/electricity prices to manage inflation levels,” said Kim Seong-hoon, an economist at Hana Securities.
No massive capital outflow even after US rate increase
Officials at the finance ministry and economists said while the bank is increasingly acknowledging that an additional rate increase by the U.S. Federal Reserve (Fed) would result in the widening rate gap between the U.S. and Korea, chances are low for Korea to be hit from a massive capital outflow.
The Fed is widely expected to raise its key rate by 25 basis points to the 5.25 percent to 5.5 percent range, July 26, according to a recent poll conducted by Reuters. Capital outflows happen when assets, equity and money leave one specific country for another attracted by better investment returns such as those offered by higher interest rates.
Given the significance of the Fed in terms of the impact of its rate decisions, the size and even the speed of the BOK's rate hike has been proportional to this.
Theoretically, a complete matching of the Fed's monetary tightening pace could lower the possibility of Korea suffering from any major capital outflow. However, as the Fed is expected to raise its base rate this month, the BOK is “looking safe” in avoiding any massive capital outflow from the wider interest rate differential. As of June this year, Korea had some $421 billion in foreign reserves, according to BOK data.
“The Korean economy is keeping its reliance on global markets. This means that the country's economy is experiencing a quite smaller moderation compared to other advanced economies. No major capital outflow has seen over the last few years despite the widening rate gap with the Fed. The BOK is positioned to maintain its balancing act in terms of maintaining the current 3.5 percent level but only based on the scenario that the Fed's July hike will be its last this year before pausing or easing again,” said Bin Ki-beom, an economics professor at Myongji University.
He added that the foreign exchange rate for the Korean won against major currencies isn't of major concern.