BOK signals autumn rate cut as inflation, economic growth slow

South Korea’s central bank is likely to reduce interest rates in the next three months as inflation is expected to ease amid a slowdown in Asia’s fourth-largest economy after freezing policy borrowing costs due to rising household debt and home prices, its head said on Thursday.

“We are getting closer to judging that conditions for a rate cut have been created looking at prices alone,” Bank of Korea Governor Rhee Chang-yong told reporters after the central bank kept its benchmark interest rate at 3.50%. “We are more confident that inflation is moving toward the (2%) target level.”

The BOK lowered its predictions on economic growth and inflation for this year. The central bank downgraded its growth forecast to 2.4% from the previous 2.5% released in May and consumer inflation expectations to 2.5% from the prior 2.6%.

Rhee said four policymakers out of six excluding himself said the BOK needs to keep the door open to lower the policy rate in the next three months. In the previous meeting in July, only two members expressed such opinions.

“If we cut interest rates too late, growth momentum is likely to weaken due to a delay in domestic demand recovery,” he said.

CUT IN OCTOBER?

Government bond yields fell across the board in the morning following the dovish remarks, with the highly liquid three-year debt yield down 2.4 basis points (bps) to 2.916%, according to the Korea Financial Investment Association.

The five-year debt yield also dipped 2.1 bps to 2.939% and the 10-year yield slipped 1.4 bps to 2.983%.

“The BOK has shown confidence that inflation is stabilizing, so the focus will now shift to financial market stability and growth,” said ING in a note. “We think the macro conditions will support a BOK rate cut in October.”

Rhee declined to comment when asked if the central bank would reduce the policy rate in October or November. The BOK is scheduled to hold only two interest rate-setting meetings this year – on Oct. 11 and Nov. 28.

“The next three months include both October and November,” he said. “We may make a decision either in October or November depending on the upcoming economic data.”


HOUSING PRICES, WON

The BOK’s decision to keep the base rate unchanged earlier in the day was unanimous due to the rising property prices, which ramped up household debt to a record high, and the weaker won currency, Rhee said.

“A cut was expected to increase property prices further and boost volatility in the foreign exchange market for now,” he said. “The BOK could not help but pay attention to real estate prices for the long-term development of the Korean economy.”

Household debt rose to an all-time high of 1,896.2 trillion won ($1.4 trillion) in the second quarter as mortgage loans grew with housing prices in Seoul and the surrounding area.

The South Korean won was another concern as it was one of the worst-performing Asian currencies with a 3.6% loss against the dollar so far this year despite its recent rallies.

The value of local unit hit a five-month high on Tuesday on expectations that the BOK was expected to hold interest rates this month although the US Federal Reserve is likely to lower borrowing costs next month.

The Fed is expected to cut its benchmark lending rate at its Sept. 17-18 meeting.

The “vast majority” of Fed policymakers indicated it might be appropriate to begin easing next month if inflation continues to slow, the minutes of last month's central bank’s policy meeting showed on Wednesday.

(Updated throughout)

Write to Jin-gyu Kang at josep@hankyung.com
 
Jongwoo Cheon edited this article.