Government and ruling party openly call for interest rate cuts

A view of an apartment complex in downtown Seoul. Reporter Cho Tae-hyung

The government and ruling party are openly calling for interest rate cuts. The pressure to cut interest rates is growing as the delinquency of loans to self-employed people has recently reached a record high and inflation is slowing down.

However, some pointed out that it is difficult for Korea to cut interest rates ahead of the U.S., given the rapid rise in household debt and fluctuations in the won-dollar exchange rate.

"The interest rate is still high, but hopefully, the interest rate will now have no choice but to go down,” Prime Minister Han Duck-soo said at a meeting on the direction of economic management for the second half of the year held on July 3. Although he did not directly order it, he indirectly suggested the direction of lowering interest rates.

Comments on interest rates come from the ruling People’s Power Party (PPP) in the process of its leader election campaign. "Interest rates are the most important issue," candidate Won Hee-ryong said during his vision presentation on the 2nd, "and the party will lead the discussion to lower them." Candidate Yoon Sang-hyun also called for the Bank of Korea (BOK) to preemptively cut interest rates. Sung Tae-yoon, head of the presidential office's policy division, publicly pressed for a rate cut in a KBS interview on June 16, saying, "The environment is ripe to cut interest rates."

The flurry of calls for a rate cut comes amid warnings that the situation of small businesses and self-employed people who have been extending loans is reaching its limits.

At the end of the first quarter of this year, the delinquency rate for self-employed borrowers was 1.52 percent, nearly tripling from about two years ago, according to BOK data. The amount of delinquent business loans for the self-employed has also reached a record 10.8 trillion won.

Conditions at home and abroad are also shaping up. The BOK has cited "inflation in the 2 percent range" as a prerequisite for a rate cut. Last month, consumer price inflation was 2.4 percent, the third consecutive month of the 2 percent range. Two days after the consumer price inflation report, the BOK said it "positively evaluates" inflation in the mid-2 percent range.

The U.S. is also one step closer to the rumor of a rate cut in September. Jerome Powell, chairman of the U.S. Federal Reserve, said at a forum in Portugal on the 2nd that the slowdown in U.S. inflation has made progress.

In response to such expectations, the 3-year Treasury bond interest rate has been hitting a new yearly low. This is why all eyes are on the Monetary Policy Committee which will be held next week. Although it is not easy for the BOK to lower interest rates preemptively than the U.S., there is a possibility that minority opinions could emerge.

Prices have fallen, but obstacles remain. Household loans extended by the five major banks in the first half of the year increased by 2.33 percent from the end of last year, exceeding the financial authorities' target. The rate cut is also feared to be a stimulus to the rise in real estate prices by triggering people to excessively lend loans.

The weakening won-dollar exchange rate, which has been hovering around 1,380 to 1,390 won per dollar, is also a concern. If the U.S. cuts interest rates before Korea, the won is likely to depreciate further.

Lim Jae-kyun, a researcher at KB Securities, said on the 4th, "We acknowledge that the possibility of a minority opinion insisting on a rate cut in July has increased since the announcement of consumer prices in June, but it is unlikely that the BOK will cut rates in August," adding, "Considering the exchange rate, it will be difficult for the BOK to lower interest rates before the U.S. Federal Reserve.”

※This article has undergone review by a professional translator after being translated by an AI translation tool.