Bank of Korea Governor Rhee Chang-yong / Yonhap

The Bank of Korea (BOK) should be able to lower the key rate after June, reassured by an overnight U.S. Federal Reserve announcement of its plans for three rate cuts throughout the year, market watchers said, Thursday.

The Fed left the benchmark rate unchanged at a range of between 5.25 and 5.5 percent, Wednesday (local time).

Korea's central bank is widely expected to keep the key rate steady at the current 3.5 percent level until June, when the Fed is expected to begin a monetary easing cycle.

"Korea will not be able to turn dovish before the Fed does," Hyundai Research Institute senior researcher Ju Won said.

He views that U.S. prices as measured by key indices have remained higher than expected,delaying the Fed's timeline for a rate cut to as late as the third quarter.

"The BOK can in theory cut rates a month after the U.S. does in June. Any which way, Korea's central bank will not lower the key rate before the Fed."

A premature easing by the BOK could exacerbate the interest rate gap between the two countries, widening it further from the current 2 percentage points. This poses a significant risk of capital outflow for the Korean economy.

Another factor at play is the fluctuation in consumer price growth, as illustrated by headline inflation reaching 3.1 percent in February, rebounding to above the 3 percent level in just one month. January's figure stood at 2.8 percent, marking the first time it fell below 3 percent since August of last year.

Local demand remains significantly subdued, exacerbated by the recent spike in global oil prices. A steady growth of the world's heaviest household debt exceeding 1,800 trillion won ($1.36 trillion) is another concern.

Some expect the much-anticipated BOK rate cut will come in August at the latest, since Korea's monetary authorities will need more evidence of a sustained stabilization both in prices and household debt growth.

The next BOK monetary policy board meeting is scheduled for April 12.

Korea-US key interest rate trend

Park Chong-hoon, head of the Korea research team at Standard Chartered Korea, said the local economy is expected to transition into an environment conducive to rate cuts in the coming months.

"Korea's economy is showing signs of a recovery, underpinned in large part by robust exports, but private consumption growth is still muted. The BOK will have greater room to maneuver, provided that consumer prices track downwards," he said.

Deputy Prime Minister and Finance Minister Choi Sang-mok said financial market fluctuations could continue, amplified by varying developments in the monetary policies of major economies.

"The rate-setting body of the Fed staying the course with monetary policy will largely stabilize the global financial market," he said during a meeting of financial authorities encompassing the heads of the BOK, Financial Supervisory Service, and Financial Services Commission.

"The government will closely monitor local and overseas financial and foreign exchange (FX) markets and spare no efforts in inducing a soft landing of real estate project financing risks," Choi added.

The probability of project financing risks spilling over to the greater financial market remains limited, he said.

The attendees agreed that the local financial and foreign exchange markets have gained vibrancy, buoyed by the inflow of foreign capital tied to the Corporate Value-up Program, a measure aimed at reinvigorating the stagnant local bourse. Foreign exchange rates are not showing any signs of movements out of sync with global currencies.

"Corporate bonds and short-term interest rates are expected to stabilize," Choi said.

The local bourse ended at 2,754.86, Thursday, up 2.41 percent from the previous session. The Korean currency closed at 1,322.4 won against the U.S. dollar, gaining 17.4 won from a day earlier.

In the U.S., the S&P 500 jumped to an all-time high of 5,224.62, Wednesday (local time), up 0.9 percent from the previous day.

Both the Dow Jones Industrial Average and the Nasdaq composite ended at a record-high, soaring 1 percent and 1.3 percent, respectively.