Value context and insight. lkm@koreatimes.co.kr
Fed rate freeze gives BOK room to maneuver
Bank of Korea (BOK) Gov. Rhee Chang-yong, left, speaks during a press conference at the bank's headquarters in Seoul, Wednesday. Yonhap
By Lee Kyung-min
The Bank of Korea (BOK) will have more room to maneuver in the pace of monetary easing in the coming months, aided by the U.S. Federal Reserve’s fourth consecutive rate freeze, market watchers said Thursday.
The Fed holding steady allows the BOK to pay more focus on the trajectory of the Korean currency relative to the U.S. dollar.
If the BOK cuts the rate with the Fed pause, the record-widest rate differential between the two countries of 2 percentage points will widen further. This in turn could trigger a capital outflow from the Korean economy, brought on by a weaker won.
Also coming into greater focus are housing prices in Seoul climbing and an uptick in household borrowing, a major financial stability consideration for the central bank.
Federal Reserve Board Chair Jerome Powell holds a news conference following a Federal Open Market Committee meeting in Washington, D.C., Wednesday. AFP-Yonhap
According to the financial market, the Fed decided to keep the federal funds rate at between 4.25 and 4.50 percent during the two-day Federal Open Market Committee (FOMC) meeting that ended Wednesday (local time).
The Fed decision came despite U.S. President Donald Trump and Treasury Secretary Scott Bessent calling for a faster pace of easing. The U.S. central bank said the rate freeze is warranted by concerns over inflation and economic slowdown, both stemming from Trump tariff uncertainties.
“This year’s tariff increases are likely to raise prices and weigh on economic activity,” Fed Chair Jerome Powell said in a press conference. “The size, duration and the timing of the tariff effects remain highly uncertain.”
Park Seok-gil, executive director of JPMorgan Chase Bank Asia Economic Research, said BOK Gov. Rhee Chang-yong’s May forward guidance was dovish overall for the short term, but cautiously hawkish for the medium term.
“Firstly, the annual growth forecast for this year was revised down to 0.8 percent, necessitating a more accommodative monetary policy,” he said in a report.
In addition to the expected rate cut being delivered, the number of Monetary Policy Board (MPB) committee members open to the possibility of a rate cut within three months increased to four, compared to two during the February rate cut.
This range of projections and possibilities, in his view, makes the BOK dot plot more accommodative than before.
“Rhee acknowledged during the May press conference that the future rate path could be lower than anticipated in the February meeting. Considering this communication, the risk to our forecast of one 25-basis-point rate cut per quarter this year seems limited.”
However, communication regarding the terminal rate level and medium-term policy stance remained cautiously hawkish, he added.
No specific guidance was provided for the rate cut path beyond three months, and Rhee said there is a low likelihood of the terminal rate falling below 2 percent, at least in the current situation.
“Considering the significant uncertainty surrounding macroeconomic forecasts and external policy conditions, and now that the nominal neutral rate level has been broadly reached, the additional policy space appears more limited, weakening the signal strength regarding the terminal rate level," Park said.
He also said he maintains the previous house view of the terminal rate falling further to 1.5 percent, lower than the current signal from the BOK. “We acknowledge the BOK's concerns regarding financial stability risks associated with a medium-term accommodative stance. However, we expect four more 25-basis-point cuts every three months, reaching a terminal rate of 1.5 percent, with the next cut anticipated in August.”
"We will continue to monitor the latest high-frequncy market and economic data to adjust the pace of easing," a BOK official said.