BOK easing pushed back amid hotter-than-expected US inflation data

U.S. Federal Reserve Chair Jerome Powell holds a press conference at the Fed in Washington, D.C., Jan. 31. Reuters-Yonhap

The timeline for the Bank of Korea's (BOK) monetary easing will be delayed, influenced chiefly by hotter-than-expected U.S. inflation data and resultant pared expectations of a May rate cut by the U.S. Federal Reserve, market watchers said Wednesday.

Economists say Korea’s central bank will not begin its easing cycle before the U.S., since the risk of foreign capital outflow far outweighs that of premature easing to reinvigorate the economy. Limiting the gap in benchmark interest rates between the two countries has been and will continue to be the BOK's top policy consideration.

Also advancing the view is the lingering “last mile” risk, whereby sustained price stabilization becomes altogether derailed due to a hastily implemented dovish pivot. The much-dreaded scenario will come into play at the BOK's rate-setting meeting on Feb. 22. Korea’s key rate remains unchanged at 3.5 percent. The U.S. federal funds rates stand at between 5.25 and 5.5 percent.

According to the U.S. Department of Labor, the country’s annual inflation came to 3.1 percent in January, down from 3.4 percent a month earlier. The cooling month-on-month figure of 3.1 percent still surpassed the market's consensus of 2.9 percent.

Hi Investment & Securities researcher Park Sang-hyun said core inflation, which excludes volatile food and energy prices and therefore has a greater impact on Fed policy, registered a higher-than-expected level of growth.

“January’s month-on-month increase of 0.4 percent still overshot market consensus,” he said. “The monthly figure climbing is explained in large part by service prices including rent.”

The probability of a May rate cut by the Fed has certainly diminished, but a cut in June is not completely out of the picture, he added.

“The hotter inflation data has left the Fed more concerned about the pace of the easing trajectory, but it is still a bit early to confirm the outright pushing back of the rate cut to the latter half. Korea’s central bank will have to monitor the developments in the U.S. in the months to come.”

Heightened policy uncertainties

Similarly, Kiwoom Securities researcher Kim Yu-mi said that the central bank will grapple with heightened policy uncertainties brought on by the U.S. data.

“The slowdown in the core inflation is valid, but the pace is not fast enough. The headline consumer price inflation still shows signs of inching up. The full moderation of sticky inflation will not materialize any time soon, leaving Korea’s central bank in a tighter bind.”

According to the Chicago Mercantile Exchange FedWatch Tool on Feb. 13 (local time), the probability of a Fed rate freeze in March reached 91.5 percent, up from the previous day’s 84 percent. This is explained by the corresponding drop in the March cut probability to 8.5 percent, down from 16 percent a day before.

The figure for a May freeze rose to 59.6 percent, up from 39.3 percent the previous day. It is explained by the corresponding drop in the probability of a May cut to 37.4 percent, down from 52.2 percent a day earlier.

The BOK data released Wednesday showed the country’s outstanding balance of bank-granted household loans registered a record high of 1,098.4 trillion won ($822 billion). The 10 consecutive months of increase is up 3.4 trillion won from the month before.

Mortgages rose to 4.9 trillion won, the second-steepest January figure since 2004 when the BOK began compiling related data.

Driving the sustained rapid growth in household debt is the falling market mortgage rates, coupled with a recent uptick in housing market demand.

Housing transactions began to decline three months ago, causing downward pressure on the growth of household loans.

However, the pressure showed an upturn, buoyed by sinking mortgage rates that reflected descending market rates since last year with a time lag of a couple of months.

BOK data released Jan. 31 showed mortgage rates came to 4.16 percent last December, the lowest since July 2022.

Data from the Ministry of Land, Infrastructure and Transport showed the number of apartment transactions in the Seoul metropolitan area stood at 10,606, up 17.2 percent from the previous month.

The double-digit spike was fueled by the ministry’s Jan. 10 property market and housing supply measures. Also factored in was the Jan. 25 policy to expand the Great Train eXpress (GTX) network to reduce commute times to around 30 minutes for Seoul, Incheon and Gyeonggi Province residents.

Korea’s main bourse KOSPI closed at 2,620.42, Wednesday, down 29.22 points or 1.1 percent from the previous session. The Korean currency closed at 1,335.4 won, losing 7.3 won against the dollar.