“The inflation rate is falling smoothly, making it easy for the Bank to lower the policy rate," a person familiar with South Korea's economy and monetary policy said. "Lowering the rate will contribute to boosting sluggish domestic demand but it will also have costs with regard to high households’ debts and rising housing prices.”
The market will dissect Rhee's comments following any potential cut to weigh whether the Bank has launched an easing cycle, or a one-off reduction, the person added.
INFLATION FALLS
South Korea’s consumer price index rose 1.6% y/y in September, down from 2.0% in August and 2.6% in July, marking its first time below 1% since March 2021. (See chart)
Overseas demand amid weak domestic consumption has continued to support the South Korean economy, with exports increasing 7.5% y/y in September for the 12th straight gain on the back of strong semiconductor shipments, which rose a record 37.1%.
Another observer said that the bank will watch closely the impact of rate cuts on households’ debt, which could undermine financial stability.
A reduction to the base rate, coupled with a Federal Reserve cut and economic stimulus measures by the People Bank of China, will support the BOK and bolster the currency, the observer added. However, the impact of China's stimulus measures on South Korean exports remained uncertain, he added, noting how the U.S. economy continued to perform will also weigh.
GOVERNOR SIGNALS
Market players are focused on whether the governor hints at additional rate cuts and how he refers to the balance of the economy and financial stability.
While the Fed could cut its benchmark rate again in November, hope for a large scale reduction is waning following recent solid labour market results. However, consistent Fed rate cuts will enable some central banks in Asia to cut interest rates as they seek to support their currencies.