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MNI (TOKYO) - The Bank of Korea is expected to lower its base rate 25 basis points to 3.25% on Friday as confidence on achieving its 2% inflation target grows and its focus shifts to high household debt and financial stability.
The board has not cut its base rate since May 2020, and has held it steady since January 2023. (See MNI BOK WATCH: On Hold, Board Mulls Cautious Rate Cuts) Governor Rhee Chang-yong noted after the board's August decision cautious rate cuts would be considered amid concerns over financial stability and global risk factors.
“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.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.