The Bank of Korea (BOK) cautiously joined a global wave of central banks cutting rates as it finally saw enough cooling of inflation and property prices to shift its attention to supporting the economy.
The central bank lowered its key policy rate by a quarter of a percentage point to 3.25 percent in a decision predicted by 20 of 22 economists surveyed by Bloomberg.
Five members of the board see the rate staying there over the next three months, BOK Governor Changyong Rhee said, a view that largely wipes out the likelihood of a follow-up rate cut next month and pours cold water on expectations for a move in January. One member opposed yesterday’s rate cut decision, another factor that suggests the bank would stand pat next month.
Photo: AFP
Rhee, speaking at a post-decision briefing, said the decision was essentially a “hawkish cut.”
The currency market also reflected that view, with the South Korean won strengthening against the US dollar as traders recalibrated their expectations for the pace of easing.
Bond yields edged down a tad, but would likely have moved more with a clearer sign of an imminent follow-up in the pipeline.
“It’s safe to say there are no more cuts coming this year,” said An Young-jin, an economist at SK Securities. “But what’s clear is Rhee’s tone has shifted. He’s sent a message that while the easing cycle has begun, markets need to manage their expectations on the pace of it.”
Before the decision, surveyed economists had essentially forecast two more rate cuts by the end of June next year. An said it is now harder to predict the level that the rate would reach by mid-2025.
With its policy pivot, the BOK joins a slew of central banks changing course to embark on easing cycles in a bid to revive economic momentum after a weakening of inflationary pressure. The Federal Reserve last month cut its key rate by half of a percentage point as ensuring a soft landing for the economy took precedence over its inflation battle. That larger-than-regular move provided more scope to central bankers in other economies to consider nudging rates down too without hammering their currencies.
“The rate cut not only responds to the consumption that’s been lackluster, but also shows the BOK can afford to loosen a bit given that the pressure pushing the inflation rate back above 2 percent appears limited,” Kiwoom Securities Co analyst Ahn Yea-ha said.
Until yesterday, the BOK had held the rate at a restrictive 3.5 percent for more than a year and a half. Policymakers extended the holding pattern in recent months on concerns that any early signals of a pivot might further fuel a rebound in the housing market and threaten financial stability.
The bank cited a “clear trend of stabilization” in inflation, a slowing in the growth of household debt and an easing of currency risks as factors behind its decision, according to a statement. While the BOK said it was slightly moderating its restrictive stance, it removed a reference to keeping policy restrictive in its concluding remarks. The bank said it would judge the pace of further rate cuts by assessing prices, economic growth and financial stability.
“The biggest reason for the cut is that there’s no need to keep the benchmark rate at a restrictive level for unnecessarily long,” Rhee said.
“The pace of easing will be determined as we monitor financial stability,” he added.
The rate cut reflects concerns over stagnant private spending and credit risks related to the construction industry. With most borrowers on floating rates, interest expenses have weighed on consumption, a drag that had prompted some lawmakers to call for rate cuts.
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