Bank of Korea to keep rates unchanged in July, cut 25 bps in Q4: Reuters Poll

BENGALURU : The Bank of Korea (BOK) will keep its policy rate on hold at a 15-year high of 3.50 per cent on Thursday, but was expected to cut the rate next quarter - around the same time as a likely start of policy easing by the U.S. Federal Reserve, a Reuters poll found.

With inflation cooling to an 11-month low of 2.4 per cent in June, but remaining above the central bank's 2 per cent target, and with the Korean won weakening by more than 6 per cent against the U.S. dollar this year, the BOK has little room to adopt a dovish stance.

All 40 economists in the July 3-8 Reuters poll expected the BOK to leave the base rate unchanged at 3.50 per cent on July 11.

"We saw the June CPI growth drop to 2.4 per cent, but I believe July numbers will be edging up. If the BOK decides to cut ahead of the Fed, the Korean won will weaken further and that will put some pressure on inflation later," said Stephen Lee, chief economist at Meritz Securities.

"The most comfortable choice the BOK can make is to see inflation stabilising below 2.5 per cent for about two consecutive months and see the Fed cutting their interest rate before going for their first cut in October."

Median forecasts showed interest rates will remain unchanged through next quarter before a 25 basis-point cut to 3.25 per cent in the final three months of the year. In a May survey, the consensus view predicted a 50 basis-point cut.

Among economists who provided an outlook until end-2024, 24 forecast it at 3.25 per cent, 15 said 3.00 per cent, with Pantheon Macroeconomics being the only participant predicting the base rate to remain steady at 3.50 per cent.

"We still believe that the BOK's first rate cut will come in October, as household debt has reaccelerated in recent months and upside risks to inflation remain high," noted Min Joo Kang, senior economist at ING.

"Inflation will likely pick up again in July as the fuel tax cut reduces and some local public services fees are set to rise. However, if July inflation turns out to be lower than expected, then the probability of a cut in August will increase."

South Korea's household debt is among the highest globally, making prolonged high interest rates painful and potentially leading to an economic downturn.

But economists in the poll expected South Korea's economic growth to improve this year, averaging 2.5 per cent in 2024 and 2.2 per cent in 2025, up from 1.4 per cent last year. Those expectations were in line with BOK estimates.

Inflation was forecast to average 2.6 per cent and 2.1 per cent this year and next respectively.

(For other stories from the Reuters global economic poll:)