(Bloomberg) — The Bank of Korea lowered its base interest rate as the domestic real estate market showed signs of cooling and inflationary pressures eased sharply, allowing authorities to finally shift their focus to supporting economic activity.
Most Read Articles on Bloomberg
The central bank cut the seven-day repurchase rate by a quarter of a percentage point to 3.25%, a decision predicted by 20 out of 22 economists surveyed by Bloomberg. The other two expect the bank to keep interest rates at 3.5% in a bid to curb house prices, which could lead to higher household debt.
Now that inflationary pressures have subsided, the Bank of Korea will take its policy stance and join the growing wave of central banks embarking on an easing cycle in an effort to restore economic momentum. Last month, the Federal Reserve cut its key policy interest rate by 0.5 percentage point, saying it prioritized ensuring a soft economic landing rather than fighting inflation.
Ahn Ye-ha, an analyst at Kiwoom Securities, said, “The latest interest rate cut is not only to respond to sluggish consumption, but also to the Bank of Korea, given that there appears to be limited pressure to push the inflation rate back above 2%. “This shows that there is room for some relaxation.” Ahn still expects the Bank of Korea to leave policy interest rates unchanged in November and to ease them gradually.
The Bank of Korea kept its policy interest rate at a restrictive 3.5% for more than a year and a half until Friday. Policymakers have widened holding patterns in recent months out of concern that early signs of a turnaround could further boost the housing market recovery and threaten financial stability.
The rate cut reflects concerns about stagnant private spending and credit risks associated with the construction industry. With most borrowers paying variable interest rates, the interest burden is a drag on consumption, and some lawmakers are calling on the central bank to cut interest rates.
“Given the prevailing negative sentiment and the Fed’s deep interest rate cuts, the market expects more from the Bank of Korea,” Standard Chartered Bank economists Chung-Hoon Park and Nicholas Chia wrote in a pre-decision note. “We expect rapid rate cuts to support economic growth and momentum.” “Still, we believe that negative sentiment toward the Korean economy has gone too far, and the Bank of Korea is likely to remain cautious about aggressively lowering the base interest rate, given the risks to financial stability.”
story continues
Bloomberg Economics speaks…
“We expect this easing cycle to proceed only gradually, as rising home prices and rising debt in Seoul remain key concerns. Our fundamental view is that the Bank of Korea The Bank will leave interest rates unchanged at the next meeting and then resume rate cuts in the first quarter of 2025.
— Hyosung Kwon, Economist
Click here for the full report
The government has sought to rein in the housing market by pledging to increase housing supply and introducing stronger regulations on mortgage lending, but the move may have reassured central banks as the market cools. . One BOK board member referred to the steps taken to reach Friday’s decision.
Goldman Sachs analysts Kwon Kwon and Andrew Tilton said in a note that “a steady pace of monetary easing is also a good way to work closely with financial regulators to achieve a soft landing for the real estate market.” It could be helpful.” Against the backdrop of potential headwinds to the economy, including slowing export growth, the Bank of Korea will cut interest rates by a quarter of a percentage point every quarter until the tax rate reaches 2.5% by the third quarter of next year. They predicted that it would be likely.
Governor Lee Chang-yong is scheduled to hold a press conference later on Friday to answer questions about the future trajectory of interest rate policy. In addition to revealing the number of directors who opposed the latest decision, the governor is likely to outline expectations among directors for interest rates over the next three months.
Factors fueling speculation about further rate cuts include lukewarm consumer spending, credit risks that undermine investment in the construction industry, and geopolitical uncertainties such as the U.S.-China trade war and the ongoing conflict in the Middle East. It will be done.
South Korea’s gross domestic product (GDP) unexpectedly contracted in the second quarter after expanding faster than expected in early 2024. Rising borrowing costs and an uncertain consumption outlook soured sentiment, while lower investment weighed on economic activity. Still, policymakers have downplayed the growth slowdown as largely temporary.
The South Korean won’s appreciation against the dollar since mid-August may have given authorities confidence that the currency can withstand the impact of interest rate cuts. Despite the gains, the won remains one of Asia’s worst-performing currencies this year.
(Adds comment from economist)
Most Read Articles on Bloomberg Businessweek
©2024 Bloomberg LP
