MNI BOK WATCH: More Evidence Needed To Cut Rates, Says Rhee

Bank of Korea Governor Rhee Chang-yong on Thursday said more evidence of slowing inflation was needed before cutting rates, and that it was necessary to consider the effect of an easing cycle on household borrowing and the won.

“It is still difficult to predict when we will start rate cuts. Since the uncertainties regarding the future path of inflation have not been completely resolved, we need to see further whether the slowing trend of inflation will continue,” he said after the BOK unanimously decided to keep its policy rate unchanged at 3.50% for a twelfth consecutive meeting.

“A rate cut is expected to have positive effects, such as alleviating sluggish domestic demand and difficulties in vulnerable sectors. However, it could also increase volatility in the foreign exchange market and contribute to the growth of household debt,” Rhee said.

The BOK will maintain “a restrictive monetary policy stance for a sufficient period of time,” he said, adding that “the Board will determine the timing and size of a rate cut based on a thorough assessment of the slowing trend of inflation and the trade-off between growth and financial stability.”

The decision to hold was in line with market expectations, given that while headline inflation slowed to 2.4% in June from 2.7% in May it remained above target.

The next meeting is scheduled for Aug 22. Markets expect the BOK to cut rates in the fourth quarter.

The BOK lowered its inflation forecast to the lower 2% range from 2.6% in May.

There has been meaningful progress on inflation, with the slowing trend continuing as expected, the Bank said, pointing also to risks related to real estate project financing, with delinquency rates consistently rising.

The Bank kept its GDP forecast this year at 2.5%, unchanged from the May’s forecast.

In the second half of this year, growth is likely to pick up again as exports continue their growth, and as the slump in consumption gradually eases, it said.