Calls to cut interest rate grow as inflation stabilizes

[Photo by Yonhap]

There is a growing call for interest rate cuts in South Korea as domestic consumer prices stabilize and the European Central Bank is expected to cut interest rates on Thursday, whetting the global appertite for rate reductions even further. In the United States, concerns about an economic slowdown, particularly in the manufacturing sector, are pointing towards an earlier-than-expected rate cut.

According to Statistics Korea on Tuesday, the country‘s consumer prices rose by 2.7 percent in May 2024 from the same period a year ago, or a 2 percent range increase, for a second consecutive month.

The inflation rate steadily declined from 3.8 percent in October 2023 to 2.9 percent in April 2024 and 2.7 percent in May. The core inflation rate, which reflects long-term price trends, fell from 2.5 percent in February 2024 to 2.4 percent in March, 2.3 percent in April, and 2.2 percent in May, to begin a clear downward trend.

Bank of Korea (BOK) Governor Rhee Chang-yong said earlier that the central bank “could consider a rate cut if the inflation rate is confirmed to be trending down to 2.3 to 2.4 percent.”

“The current real interest rate is high compared to the neutral rate, and it is questionable how long the BOK will maintain its tight monetary policy,” Korea University professor of economics Lee Jong-wha said during an international conference for the 25th anniversary of the Korea Center for International Finance’s founding on Tuesday. “If the policy continues to be tightened, it could adversely affect domestic demand and investment as well as negatively impacting small and medium-sized enterprise debt and real estate project financing.”

Monetary authorities in both Korea and the United States have maintained a policy of holding the base interest rate to control high inflation, but there are views that the policy needs to be eased to keep up with evolving price and economic conditions. The base interest rates in the two countries are currently 3.50 percent and 5.50 percent respectively.

The call for interest rate cuts is resurfacing in the United States in particular as concerns about an economic slowdown grow following a series of economic indicators that were weaker than expected.

The U.S. Institute for Supply Management (ISM) announced on Monday (local time) that its manufacturing purchasing managers’ index (PMI) for May 2024 was 48.7, lower than market expectations. This figure is even lower than the the previous month’s figure of 49.2, indicating an economic contraction.

A PMI below 50 signifies an economic contraction. The U.S. Department of Commerce reported that construction spending decreased by 0.1 percent in April 2024 compared to the previous month to decline for a second consecutive month.