BOK under growing pressure to cut key rate

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during the 74th anniversary of the BOK at its headquaters in central Seoul, June 12. Yonhap

Possible August rate cut to depend on foreign exchange rate, exports, consumer spending: experts

The Bank of Korea (BOK) is under mounting pressure to cut its benchmark interest rate, which stands at the highest level in more than 15 years and increases the burden of repayment on financially vulnerable borrowers.

According to the ruling People Power Party (PPP), Friday, BOK Deputy Gov. Ryoo Sang-dai and other senior financial officials will join a party meeting scheduled next Thursday to discuss ways to stabilize public livelihood.

The party explained it accordingly wants to help the government in spurring economic growth.

The meeting comes as the BOK has been stressing independence in rate decision, whereas government and party officials have been calling for a need to lower the BOK's policy rate.

Sung Tae-yoon, the presidential chief of staff for policy, said that conditions are ripening for rate cuts.

Also, PPP leader Hwang Woo-yea pointed out that central banks of Canada, Sweden, Switzerland and the European Union have shifted to rate cuts after global montary tightening and that the BOK should take corresponding steps.

The BOK has been keeping the rate steady at 3.5 percent since January 2023 after aggressively carrying out monetary tightening campaign from April 2022 to bring down post-pandemic inflation driven by expansionary fiscal policy.

The BOK's rate accordingly stands at the highest since December 2008.

And with easing inflation, the BOK is now asked to join again other central banks that are lowering their respective policy rate.

U.S. Federal Reserve Bank Chair Jerome Powell announces that interest rates will remain unchanged during a news conference at the Fed's William McChesney Martin building in Washington, June 12. AFP-Yonhap

The financial market deems the BOK may consider rate cuts in August at the earliest before that of the U.S. Federal Reserve begins, possibly in September or November.

Experts were divided over the BOK’s timing of the rate cuts.

"Lowering the rate before the Fed does means a wider U.S.-Korea rate gap, and that is not a plausible scenario because it can make the currency rate more volatile," said Meritz Securities researcher Yoon Yeo-sam.

He referred to the U.S. rate staying between 5.25 percent and 5.5 percent and the rate gap between the allies widened to an all-time high of 1.75-2.0 percentage points.

The Korean won has been hovering above psychological threshold of 1,300 won per U.S. dollar throughout this year.

Woo Hye-young, an Ebest Investment & Securities analyst, speculated Korea will take preemptive measures before the Fed's rate cuts and that the BOK lowering rate in August is "a convincing scenario."

"The government needs to consider boosting both exports and domestic consumption, and one way to deal with it is to keep the rate policy in tandem with that of the U.S.," the analyst said.