BOK chief says not to expect a rate cut for the time being

The Bank of Korea (BOK) Governor Rhee Chang-yong announces at the Jeju Forum on July 14. [Photo provided by Korea Chamber of Commerce and Industry]

The Bank of Korea (BOK) Governor Rhee Chang-yong cautioned against expecting interest rate cuts, saying that it would be challenging to lower rates for the time being.

“The central bank will monitor the situation by the end of the year and adjust rates from a macroeconomic perspective,” he said.

Speaking at the Jeju Forum hosted by the Korea Chamber of Commerce and Industry on Jeju Island on Friday, Governor Lee made the remarks in response to the speculation surrounding interest rate cuts.

On Thursday, the central bank’s monetary policy committee decided to maintain the benchmark interest rate at 3.5 percent during a monetary policy committee meeting.

“I think a lot of people are thinking that it’s time to cut rates from now on, but what the BOK is being cautious about is that (inflation) is likely to rise to 3.5 percent by the end of the year, given the underlying effects,” Lee said. “I don’t know what will happen next year.”

Lee identified inflation and household debt as reasons why interest rate cuts are difficult.

“Since we are not certain whether inflation will decrease sufficiently, we need to monitor the situation,” he said.

Lee also expressed concerns about the widening interest rate gap and the potential impact on the foreign exchange market if Korea were to lower rates while the U.S. raises rates, as the U.S. Federal Reserve could increase rates by two more times.

“We have to wait and see because we’re not sure if inflation will come down enough technically,” he said. “The U.S. could raise rates two more times, so if we cut rates, the gap will be much wider and I‘m worried about what will happen to the foreign exchange market.”

With the BOK’s decision to maintain rates for the fourth consecutive time, the interest rate gap between Korea (3.50 percent) and the U.S. (5.00-5.25 percent) remains at 1.75 percentage points.

However, if the U.S. Federal Reserve raises rates by the expected 0.25 percentage point at the Federal Open Market Committee (FOMC) regular meeting on July 26, the gap would widen to 2.00 percentage points.

Lee mentioned the increase in household debt over the past three months since the interest rate was set at 3.5 percent. While acknowledging that short-term debt increases were inevitable, he emphasized that high levels of household debt posed a long-term burden.

As for the outlook on the economy going forward, the BOK chief, said, “I think it’s a question of the speed of the rebound, not whether it’s going to happen.”

In May, the central bank revised down its real GDP growth forecast for this year to 1.4 percent from 1.6 percent.

Lee also mentioned the role of the U.S. and China in Korea’s exports, saying that the U.S. economy was expected to have a higher growth rate, which would be favorable for Korea. However, he highlighted the uncertainty surrounding China’s economy, saying that its growth in the second half or next year could be more uncertain.