KRW rates: Stronger rate cut signals
A rate cut within the next three months.
Group Research - Econs, Ma Tieying12 Jul 2024
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The Bank of Korea signalled a stronger likelihood of rate cuts at the July 11 meeting. In its policy statement, the BOK indicated that “inflation will gradually converge on the target level,” a notable shift from the May statement, which deemed it “premature to be confident” about inflation converging to the target level. Additionally, the BOK stated for the first time that the Board will “evaluate the timing of a rate cut”. The governor revealed that two out of seven board members are open to reducing rates below 3.50% within the next three months.

The ongoing inflation slowdown is expected to lead to BOK rate cuts within the next three months. CPI has slowed to a one-year low of 2.4% YoY as of June, with monthly growth averaging 0% over the past four months. Core CPI has been stable in the 2.0-2.5% YoY range for six months, with a 0.2% MoM average. We are revising our full-year CPI forecast down to 2.4% from 2.8% and expect the BOK to lower its 2024 CPI forecast from the current 2.6% at the August meeting.

The pace of rate cuts may be constrained by factors such as the rebound in housing prices in Seoul, rising household debt, and the weakness of the KRW. Seoul’s property prices have posted weekly gains of 0.1% over the past four weeks, while nationwide property prices have been stagnant. The BOK emphasized in its statement that it will carefully weigh policy variables including inflation, growth, and financial stability.

We maintain our forecast for a 25bps rate cut starting from October, which would lower the benchmark rate to 3.25% by end-2024 and to 2.50% by end-2025. There is a 30% possibility that rate cuts could begin in August, when the BOK updates its economic forecasts. If this occurs, BOK rate cuts would precede those of the Fed. Negative interest rate differentials could put depreciation pressure on the KRW, offsetting the positive impacts of AI-related developments on South Korea’s exports and equity inflows.

Ma Tieying 馬鐵英, CFA

Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
[email protected]

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