Bank of Korea Governor Rhee Chang-yong / Yonhap
The possibility of the Bank of Korea (BOK) initiating an easing cycle next month is increasing, buoyed by the U.S. Federal Reserve's (Fed) recent rate cut of 50 basis points, market watchers said Thursday.
The rapid buildup of household debt is expected to be the biggest policy concern, as headline inflation over the past few months has trended down to the central bank's target of 2 percent.
Also favorable is muted volatility of the Korean currency against the U.S. dollar — a factor for a diminished risk of capital outflow in an emerging economy extremely vulnerable to foreign investor sentiment.
Further warranting the easing is stagnant overall economy, defined by robust exports of select manufactured goods barely eclipsing post-pandemic years of subdued consumption from the vast majority of the public.
Experts say the recently fortified macroprudential policy tools including stress debt service ratio (DSR) measures should be able to rein in the country's household debt. The stress DSR applies add-ons to assess the borrower's repayment capacity relative to their income in a hypothetical scenario of a rate hike, thereby reducing the maximum borrowable amount.
Financial stability
“Household debt and property prices are becoming key factors in considerations for an easing,” Yoon Jee-ho of BNP Paribas Korea said.
Five months of sharp growth in household loans raises concerns from a financial stability perspective, he said.
However, the large volume of household loans is expected to be brought under control, aided by the implementation of the second phase of the stress DSR.
“We may need a couple of more months to gain confidence in the downtrend of household debt, but the government's measures are likely to decelerate the pace of debt growth.”
The market has already priced in at least three quarter point rate cuts, a basis for the brokerage to maintain the view for an October cut.
“The rapid pace of a BOK easing has largely been ruled out, as indicated by the price movements of key benchmark products,” he said.
Park Chong-hoon, a director at Standard Chartered Bank Korea, said the Fed's big cut provides the BOK with greater room to maneuver.
The U.S.-Korea key rate differential remains one of the most crucial factors, closely linked to changes in the valuation of the Korean currency and subsequent shifts in foreign investor risk appetite, he said.
“Concerns about the Korean currency plunging is limited, buffered by the Fed turning dovish before the BOK. The won is not likely to experience great volatility, unless sudden global geopolitical tensions arise,” Park said.
More members of the central bank's monetary policy body will be inclined toward a rate cut in his view.
“Four of six rate-setters on the Monetary Policy Committee said in August that they were open to the possibility of easing within three months. Global and domestic financial conditions have since registered developments conducive to the beginning of an easing cycle.”
Meanwhile, fears of a recession linger.
According to an Aug. 23 BOK report, Korea's exports of U.S.-bound intermediate goods, including steel, chemical, and petroleum products, are expected to decline if the world's largest economy grows at a slower-than-expected pace.
Adding to the pessimism is the growing dependence of Korean exports on U.S. consumer sentiment over the past four years, amid strengthened bilateral economic ties.
Earlier in the day, Financial Supervisory Service Governor Lee Bok-hyun urged closer monitoring of market volatility, highlighting the mismatch between economic indicators and market expectations.
“Of seven previous Fed rate cuts, four led to a soft landing within a year of the easing cycle, whereas three ended in a recession,” he said. “The soundness of the foreign exchange market should be closely monitored for potential scenarios such as capital outflows, including the unwinding of yen carry trades.”