Bank of Korea to stay pat on Thursday, first rate cut seen in Oct: Reuters poll
The building of Bank of Korea is seen in Seoul, South Korea, on Jul 14, 2016. (Photo: REUTERS/Kim Hong-Ji)
BENGALURU: The Bank of Korea will keep its key interest rate at 3.50 per cent on Thursday (Aug 22) and cut it next quarter after the US Federal Reserve likely begins easing in September, according to a Reuters poll.
The benchmark rate has been at 3.50 per cent since January 2023. With inflation rising 2.6 per cent in July from an 11-month low of 2.4 per cent in June, moving further away from the central bank's 2 per cent target, the BOK may need to see prices stabilising before it starts to ease policy.
The Korean won, which has lost over 3 per cent against the dollar this year and is one of the worst-performing emerging market currencies in 2024, was also likely to prevent the BOK from leapfrogging the US Federal Reserve's first rate cut, which is widely expected to come in September.
A strong majority of economists, 38 of 40, in the Aug 13-19 poll forecast the central bank would keep its base rate unchanged at 3.50 per cent on Aug 22. The remaining two predicted a 25 basis point cut to 3.25 per cent.
Although two board members said in July they were open to rate cuts, economists cautioned such a move could exacerbate house price increases in Seoul, heightening concerns in a country with one of the world's highest household debt-to-GDP ratios, at 104.3 per cent in the first quarter.
"The BoK will continue to signal a more dovish stance, albeit cautiously, given persistent concerns about rising home prices and the associated financial stability risks," wrote Krystal Tan, economist at ANZ Bank.
"Our base case is still for the BoK to kick off its rate easing cycle in October, following a likely Fed pivot in September. The government is also set to tighten debt service ratio regulations from September, which should help contain growth in household debt."
Median forecasts showed no change to interest rates this quarter but predicted a 25 basis point cut to 3.25 per cent in the October-December quarter. This outlook was largely unchanged from a July survey.
Among economists who provided an outlook until the end of 2024, 27 forecast the rate would be at 3.25 per cent, while eight predicted 3.00 per cent.
"We think the BOK will cut rates in October, with inflation higher than expected there is no urgency ... to cut as soon as August. Also, house prices in Korea (are) actually quite high at the moment," said Kelvin Lam, senior economist at Pantheon Macroeconomics.
The BOK has cited growth in household debt and rising home prices as key factors it is monitoring before opening the door to rate cuts. House price increases accelerated in July, with prices in Seoul increasing the most in over four years.
Going into next year, the BOK was expected to cut rates by an additional 75 basis points, bringing its interest rate to 2.50 per cent by the end of 2025, the poll showed.
