Value context and insight. lkm@koreatimes.co.kr
Dovish Fed gives more leeway to BOK
BOK Governor Lee Ju-yeol
By Lee Kyung-min
Sluggish exports, job raise possibility of rate cuts
By Lee Kyung-min
The Bank of Korea (BOK) is expected to have greater leeway in its key rate decision, following a dovish remark made by the U.S. Federal Reserve Chairman Jerome Powell over the weekend.
There are many variables the BOK should take into consideration but the U.S. rate hike is seen as one the most critical factors that affect the course of Korea's monetary policy.
“With the muted inflation readings that we've seen coming in, we will be patient as we watch to see how the economy evolves,” Powell said during a panel discussion at the American Economic Association annual meeting in Atlanta, Georgia, Jan 4 (local time).
“We're always prepared to shift the stance of policy and to shift it significantly if necessary.”
The remarks came after a recent plunge in the U.S. stock market which drew criticism from the U.S. President Donald Trump who blamed Powell for “hurting the economy.”
Powell's dovish comments came a few days after BOK Governor Lee Ju-yeol said Jan. 2 that implication of the Fed's policy on Korea will be “greater than ever” in 2019.
“The recent less hawkish stance from the Fed will play a positive role here including maintaining financial market stability. The pace of Fed's monetary policy will affect the country to a substantial degree,” he said at the press briefing.
Indeed, Powell's stance will help BOK to monitor domestic and global economic conditions with less of a pressure to raise the key rate as it reduced, albeit temporality, the fear of massive foreign capital outflow triggered by a widened gap between the U.S. and Korea.
U.S. Federal Reserve Chairman Jerome Powell
“The BOK raised the key rate in November 2018 primarily due to fears of widening rate gap between Korea and the U.S., which could trigger massive foreign capital outflow, among other consequences, fully aware of the domestic circumstances that were far from needing a rate hike,” said Yun Chang-hyun, a business professor at the University of Seoul.
The rate gap between the U.S. and Korea remains at 0.75 percent after the BOK and the U.S. Fed raised its key interest rate to 1.75 percent in November 2018 and 2.5 percent in December in 2018, respectively.
Possibility of rate cuts
Some global economists expect that a similar “accommodative and expansionary” policy can be expected in Korea with expectation growing that BOK can even lower the rate, citing worsening economic data.
Samsung Electronics, the world's largest chipmaker, posted 10.8 trillion won in operating profit in the fourth quarter in 2018, a 28.7 percent drop from a year earlier.
The job creation hit a nine-year low in December, with the number of employed people reaching 26.63 million, only a rise of 34,000 from the same month in 2017, the lowest since 2009.
“Our baseline view is that the BOK will leave the policy rate at 1.75 percent through 2019 and deliver a 25 basis points cut to 1.5 percent in 2020,” Nomura Financial Investment senior economist Kwon Young-sun said in a recent report.
“If the Fed stops hiking rates earlier than our base case of September 2019, household debt growth slows much faster, we believe the BOK will deliver rate cuts in 2019, ahead of our base case forecast of 2020,” he added, noting that the firm's U.S. team “sees more uncertainty on the timing of Fed hikes in 2019.”
Household debt is among the key economic indices the central bank watches with greatest attention as the indicator of a growing economic imbalance.
Now estimated at 1,514 trillion won ($1.3 trillion), the soaring household debt is one of the most widely cited factors giving the BOK a reason to raise borrowing costs, as the low interest rate encouraged people to buy multiple homes to make capital gains, which has pushed up apartment prices.
Yoon of the University of Seoul also expect that the central bank may consider lowering the rate in the latter half of 2019.
“Given the worsening economic data indicative of further economic downturn in the coming months, the BOK may lower the rate by 25 basis points three months or six months from now.”