More BOK members project rate cut in coming months, followed by a freeze this month

Calls for the base rate reduction have been growing in Korea amid sluggish domestic demand and inflation stabilizing within the 2-percent range. However, the soaring apartment prices in Seoul and surrounding regions remain a major risk for the BOK.

Bank of Korea Gov. Rhee Chang-yong bangs the gavel to open a meeting of the central bank's Monetary Policy Committee in central Seoul on Thursday. [BANK OF KOREA]

Four out of six members of the Bank of Korea's (BOK's) monetary policy board — excluding its governor — projected a rate cut in the coming three months following August's decision to keep the interest rate unchanged.

Thursday's decision to hold the rate at 3.50 percent for the 13th straight meeting was unanimous, marking the longest run of rate freezes. The BOK has been saddled with contrasting mandates to boost faltering domestic demand and ensure financial stability, but Gov. Rhee Chang-yong said the central bank “placed a higher weight on financial stability” in making the latest decision.

Given weaker-than-expected domestic demand, BOK also lowered its GDP projection to 2.4 percent from 2.5 percent.

“Growth has been revised down by 0.1 percentage points, taking into account the temporary, yet stronger-than-expected, upside surprise in the first quarter fading,” the central bank said in a statement, referring to the 3.4 percent yearly GDP growth during the first three months.

“However, the underlying trend of growth has not shifted,” the bank said.

The U.S. Federal Reserve is widely expected to begin rate cuts in September. The minutes of last month's Federal Open Market Committee (FOMC) meeting indicated that the “vast majority” of Fed officials expect to cut interest rates at the upcoming FOMC meeting if economic readings continue to “come in about as expected.”

Calls for a reduction of the base rate have been growing in Korea amid sluggish domestic demand and inflation stabilizing within the two percent range. However, soaring apartment prices in Seoul and surrounding regions remains a major risk for the BOK.

Korea’s headline inflation inched up to 2.6 percent in July compared to the same period of last year, an acceleration from the previous month’s 2.4 percent, mainly driven by heavy downpours during the monsoon season and the resulting surge in agricultural product prices. Nevertheless, inflation remained below the three percent mark for the fourth consecutive month.

Meanwhile, household debts rebounded in the second quarter to a record of 1,896.2 trillion won ($1.42 trillion), up 0.7 percent from the previous quarter, driven by a rapid surge of mortgage loans.

Ninety percent of bond experts, including analysts, expect the BOK’s Monetary Policy Board to hold the rate steady, according to a survey the Korea Financial Investment Association (Kofia) released Tuesday. Ninety-nine percent made the same prediction ahead of the previous rate-setting meeting in July.

The remaining 10 percent forecast a 25-basis-point rate cut in August.

“With the U.S. Fed widely expected to cut its rates in September and concerns growing over slow domestic demand, the expectation for the base rate reduction has increased compared to the previous month, yet the majority of respondents still forecast the rate would be held steady due to risks regarding household debts and the real estate sector,” Kofia said.

BY SHIN HA-NEE, PARK EUN-JEE [shin.hanee@joongang.co.kr]