Bank of Korea Looks to the U.S. Amid Rate Cut Speculations

the benchmark interest rate

The Bank of Korea's Monetary Policy Committee is scheduled to meet on August 22 to decide on the benchmark interest rate. While the market anticipates the 13th consecutive rate freeze, considering the U.S.'s potential rate cut and domestic economic conditions, there is a growing argument for the necessity of a rate cut. This blog will explore the background and prospects of the Bank of Korea's interest rate decision.

The Bank of Korea's Monetary Policy Committee will convene on August 22 to decide on the benchmark interest rate. Currently, the market expects the Bank of Korea to maintain the rate at the current 3.5%. If another freeze is decided, it will mark the 13th consecutive rate freeze, setting a record for the longest duration.

Last month, the consumer price index (CPI) rose by 2.4% year-on-year, showing a downward trend, and the expected inflation rate also fell to the 2% range for the first time in two years and four months. This can be interpreted as a signal of price stability, but the GDP growth rate for the second quarter recorded -0.2% quarter-on-quarter, raising concerns about economic growth. Particularly, private consumption, construction investment, and facility investment all recorded negative growth, exacerbating the severe domestic demand slump.

With consumer prices in a downward trend and the economy struggling, conditions seem ripe for a rate cut. However, concerns about financial stability remain. House prices, particularly in the capital area, are rising, and household debt is increasing, raising fears about the potential fallout from a rate cut. Additionally, the interest rate gap with the U.S. Federal Reserve is at a record 2 percentage points, which could exacerbate volatility in the Korean won.

Experts argue that a rate cut is necessary due to the slowing inflation and weak domestic demand. Seok Byung-hoon, a professor of economics at Ewha Womans University, said, "The second-quarter growth rate was worse than expected, and high interest rates are causing a slump in domestic consumption and investment. Core inflation is stabilizing, and it takes more than a year for a rate cut to stimulate consumption and investment, so a rate cut is urgent." Regarding the soaring household debt, he added, "The financial authorities should reduce exceptions to the Debt Service Ratio (DSR) regulations. If the base rate cannot be lowered due to household debt, the side effects of high interest rates will be greater."

Currently, with a high likelihood of a U.S. rate cut in September, it is likely that Korea will follow suit with a rate cut starting in October. However, if the U.S. Federal Open Market Committee (FOMC) makes a surprise rate cut on July 31 or gives a strong signal for a rate cut, there is a possibility that Korea might preemptively lower rates. Kang Seung-won, a researcher at NH Investment & Securities, left the possibility of a rate cut open, stating, "From the central bank's perspective, the significance of the economy and inflation is considerable. Given the trend of easing inflation and the domestic economic slump, there is room for a rate cut."

The Bank of Korea's interest rate decision will have significant implications not only for the domestic economy but also for the global economy. While a rate freeze is currently the most likely scenario, considering the U.S.'s rate cut moves and domestic economic conditions, there is also a growing case for a rate cut. The upcoming decision by the Bank of Korea next month is highly anticipated, and its impact on the broader economy will be closely watched.