MNI BOK WATCH: Governor Cautiously Mulls Further Cuts
MNI (TOKYO) - Bank of Korea Governor Rhee Chang-yong on Friday flagged the potential for further, timely rate cuts, following the board's decision to cut the base rate 25 basis points to 3.25% on Friday, noting additional easing would occur cautiously with a focus on financial stability and high house prices.
“The Board will determine the pace of further rate cuts in a careful and balanced manner, based on a thorough assessment of the trade-offs among policy variables such as inflation, growth, and financial stability,” Rhee told reporters, noting there was no need to hold the base rate restrictive for an unnecessarily long time.
Friday's largely anticipated decision was the first cut since May 2020 and reflected growing concern on the slowing economy and confidence on inflation. (See MNI BOK WATCH: 25bp Cut Likely, Board To Focus On Debt) The Bank had held the rate at 3.5% since its last 25bp hike in January 2023.
However, the Bank remains wary of stimulating the housing market and is expected to take a gradual approach to easing, refraining from continuous or larger cuts.
“As inflation is expected to stabilise at the target level, it is necessary to gradually adjust the Base Rate toward a neutral level,” Rhee continued. “However, on the output side, uncertainties regarding the outlook have increased, while on the financial stability side, we still need to be mindful of rising household debt."
The Bank must weigh the trade-off between domestic demand, exports and financial stability that has created a challenging policy environment, one not encountered during previous policy pivots, Rhee cautioned.
The Board also decided to lower the interest rate on programs under the Bank Intermediated Lending Support Facility 25bp to 1.75% to enhance support for vulnerable small and medium-sized enterprises (SMEs).
DOMESTIC DEMAND CONCERNS
The BOK expects the domestic economy to continue its moderate growth trend. However, the Bank noted uncertainty surrounding the growth outlook (2.4% this year, 2.1% in 2025) have heightened compared to August due to the delayed recovery in domestic demand.
The pace of recovery, economic conditions in major countries, and trends in IT exports will likely influence the future path of economic growth, the Bank noted.
CAUTIOUS PRICE VIEW
Rhee said inflation will likely remain stable with weak demand pressure below the 2% level for some time, slightly lower than the August forecast of 2.5% this year.
However, the governor warned high uncertainties existed over changes in global oil prices due to Middle East tension, movements in exchange rates, and adjustments in public utility fees.
The Board next meets Nov. 28.