Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
BOK's tough choice: balancing Trump volatility, household debt, growth
Korea's finance and economic leaders gather at the Export-Import Bank of Korea headquarters in Seoul to discuss macroeconomic issues, Friday. From left are Financial Supervisory Service Gov. Lee Bok-hyun, Bank of Korea Gov. Rhee Chang-yong, Finance Minister Choi Sang-mok and Financial Services Commission Chairman Kim Byoung-hwan. Joint Press Corps
By Lee Yeon-woo
Market awaits central bank's decision after Fed lowers rate
As the U.S. Federal Open Market Committee (FOMC) lowered its policy rate by 0.25 percentage points on Thursday (local time), all eyes are on whether the Bank of Korea (BOK) will follow suit at its next monetary policy board meeting slated for Nov. 28, the last one this year.
With inflation in the 1-percent range and sluggish growth already setting the stage for another rate cut, the rising won-dollar exchange rate and increased volatility following Donald Trump's victory in the U.S. presidential election are adding to the central bank's concerns, according to market watchers on Friday.
Market sentiment suggests that the BOK will hold the rate steady at the November meeting and watch how the situation develops.
At a meeting on Friday after the FOMC decision, BOK Senior Deputy Gov. Ryoo Sang-dai expressed concerns about the potential increase in volatility following the U.S. election.
"Given the heightened uncertainty surrounding the global growth and inflation trends, as well as the trajectory of major countries' monetary policies, there is a possibility that volatility in foreign exchange and financial markets could increase depending on the specifics of policy direction under the second Trump administration," Ryoo said.
The conditions for a rate cut are already in place. The FOMC's decision has narrowed the key interest rate gap between the U.S. and Korea to 1.5 percentage points. Korea's inflation rate, which has remained in the 1-percent range for two consecutive months, also provides a solid foundation for price stability, according to BOK Deputy Gov. Kim Woong.
Another stronger justification for a rate cut is the sluggish 0.1 percent growth in the third quarter of this year, which is significantly lower than the BOK's initial forecast of 0.5 percent. The BOK is also expected to revise the country's annual growth forecast and will announce the updated projections at the November monetary policy meeting.
However, a major concern is the high won-dollar exchange rate, which touched the 1,400 won-range since the U.S. election ballot count began.
This is due to Trump's planned short-term fiscal spending, based on promises of implementing expansionary fiscal policies. This could lead to an increase in long-term government bond supply, pushing up long-term interest rates and strengthening the dollar, according to Christy Tan, investment strategist for Asia Pacific at the Franklin Templeton Institute.
If the BOK cuts its policy rate in this environment, the climbing exchange rate could be further amplified, thereby accelerating the exodus of foreign funds from Korea and triggering higher import prices. Another concern is that it's still too early to feel confident about household debt, as Korea's debt-to-GDP ratio remains one of the highest in the world.
BOK Gov. Rhee Chang-yong said at the parliamentary audit in October that the board will make the decision "after comprehensively considering how the strong dollar will behave after the U.S. presidential election and how the macroeconomic policies aimed at stability, which started a month ago, will impact real estate and household loans."
"(The) BOK has room as the U.S. rate level is still higher than Korea's," Lee Jae-hyung, fixed income strategist at Yuanta Securities, said. "With household loans still highlighted as major issues, there are no special reasons to cut the policy rate in November unless there are apparent domestic issues."
The FOMC unanimously decided to set the rate between 4.5 percent and 4.75 percent, lowering it by a quarter percentage point. In September, the FOMC implemented a 0.5 percentage point cut, to which the BOK responded with a 0.25 percentage point cut.