US Fed’s dovish signal puts Korean rate cut on table

Investors turn eyes to BOK as major economies weigh pivot in monetary policy

Bank of Korea Gov. Rhee Chang-yong speaks at a press conference held at the policy bank's headquarters in central Seoul, July 11. (Joint Press Corps-Yonhap)

The US Federal Reserve's signal for a key rate cut has paved the path for the Bank of Korea to embark on an interest rate-cutting cycle soon, amid concerns about surging household debts and currency volatility.

After keeping the benchmark rate unchanged at a range of between 5.25 and 5.5 percent, US Fed Chair Jerome Powell hinted the Fed could bring down the rate soon on the condition the US economy follows its expected path.

Fueled by the anticipation of the Fed’s rate cut, the value of the Korean won against the US dollar strengthened to 1,366.2 won on Thursday. It was the first time the figure entered the 1,360 won range during intraday trading since June 13.

Seoul shares closed higher on Thursday, backed by the projection.

The benchmark Kospi wrapped up at 2,777.68, up 6.99 points, or 0.25 percent. It even hit as high as 2,794.11 points during trading hours, but later lost over 15 points. The secondary bourse Kosdaq closed at 813.53, gaining 10.38 points, or 1.29 percent.

The US rate freeze maintained the interest rate gap between Korea and the US at an all-time high of 2 percentage points. The BOK has been keeping the key rate steady at 3.5 percent for more than a year and a half.

While rising prices have remained a hurdle for a rate cut here, inflationary pressure has been easing off in recent months, figures showed.

The country’s consumer prices rose by 2.4 percent on-year in July. The figure has stayed in the 2 percent range for the past three months. Local authorities expect the consumer price growth to fall to the target level of 2 percent within this year.

Yet surging household debts remain a concern.

The outstanding value of household debt taken out at local banks stood at 715.74 trillion won ($523 billion) as of July, surging by 7 trillion won per month. It was the largest monthly increase seen since April 2021.

Changing conditions of the global financial market are a variable, too. In recent months, central banks of major economies have taken a turn in their monetary policy stance, or have signaled a pivot.

In June, the European Central Bank cut its rate by 0.25 percentage points for the first time in nearly five years, though it held the rate steady the following month. The Bank of Japan began its rate-hike cycle in March and raised the base rate by another 0.25 percentage point on Wednesday.

Market experts viewed the BOK could start to cut its key rate soon, while its monetary policy stance will continue to be restricted by external factors.

“The Korean won gaining value in response to the eased stance of the Fed brings down the concerns on the currency for the BOK,” analyst Lim Jae-kyun from KB Securities said.

“But factors such as the relatively high won-dollar currency rate in the late 1,300 won range and the rise in housing prices in the Seoul area continue to pressure the central bank.”

Analyst Ahn Ye-ha of Kiwoom Securities expects the BOK will cut its rate by a quarter percentage point in October.

“Both Korea and the US will exercise a rate cut at a limited level as the cuts aim to ease the inflation-battling monetary tightening environment, rather than preventing an economic slowdown,” she said.

Local authorities continued to keep a cautious stance in an attempt to settle the market excited by the projection of an incoming rate cut.

"Though the Fed has indicated a possibility of a changeover in its monetary policy stance, uncertainty lies in the timing and the range of the cut," BOK Deputy Gov. Ryoo Sang-dai said at a meeting convened after the US Fed’s rate decision.

Ryoo further stressed the BOK will continue to closely monitor the risks of financial stability including the rise in housing prices led by the Seoul metropolitan area, a surge in household debts, and escalating volatility in the financial market.

By Im Eun-byel(silverstar@heraldcorp.com)