BOK eyes policy shift as inflation shows signs of cooling
Bank of Korea Governor Rhee Chang-yong speaks during a press conference at the central bank headquarters in Seoul, Thursday. Yonhap
The Bank of Korea (BOK) will lower the key rate at an appropriate time underpinned by tempered inflation, the country’s top monetary policy maker said Thursday, in a significant dovish shift in tone suggesting an end to the 12 consecutive restrictive policy freezes over the past 18 months. However, he cautioned against expectations of an imminent rate cut. The central bank left the key rate unchanged at 3.5 percent.
Chief among the risk factors in easing is the pace of household debt growth, a major financial stability consideration tied almost exclusively to the most interest-sensitive spending, according to Bank of Korea Governor Rhee Chang-yong. Also coming into play to a greater extent are the county’s growth profile and currency value.
The BOK easing preceding the U.S. Federal Reserve (Fed) is not a possibility, in his view, a stance reflective of plunging value of the Korean won feared to crash further, only to disturb months of stabilizing inflation dynamics.
Two of six monetary policy committee members were open to the possibility of easing in the next three months, he added, a forward guidance on the three-month horizon.
“It is not a matter of if, but when,” Rhee said during a press conference at the central bank headquarters in Seoul.
The mention of the need to maintain a restrictive stance for an "extended" period was removed from the policy decision statement a while ago, replaced with “a rate cut.”
Rhee used an analogy of changing lanes as a gauge of the committee members’ inclination toward a rate cut.
“In May, the concern was mearely about whether to consider the lane change at all. We have since fully changed the lane. It is now about the timing and the degree of easing.”
Extending the collective restrictive stance of the committee members through May was, he added, the trajectory of inflation lacking clear signs of sustained downward stabilization.
The June reading of consumer price index in that sense was an easing positive. The headline inflation slumped to an 11-month low of 2.4 percent. It was a steady decline from 3.1 percent since March. Core inflation excluding volatile food and energy prices inched down to 2.2 percent last month.
The favorable price development notwithstanding, the members have since faced a rapid build-up in household debt, a fresh major concern for the central bank with a dual mandate of price stability and financial stability.
“The housing prices in greater Seoul metropolitan area have surged, accumulating a sharp household debt. An expedited easing must not proceed, as warranted by the concerning development over the past two months.”
The governor reiterated that supply-side shocks bring consequences beyond the control of monetary policy, dispelling heated criticism over what critics characterize as "a failed price mandate."
“We aim to control the inflation rates, not the price level itself. Nor can we be effective in the latter objective that remains within the purview of the fiscal and food authorities," he said. “Agricultural produce, for example, can be influenced by trade barriers, fiscal policy, among other conditions.”
Previous BOK mandate sought to control core inflation rate, only to revert to the original targeting of headline inflation, a better anchor for the inflation expectations.
“Monetary policy is only as effective as the degree of management in inflation expectations of the vast majority of consumers. They are far more susceptible to headline inflation than core figures.”
Park Seok-gil, executive director of JPMorgan Chase Bank Asia Economic Research, said the BOK views the risk of a premature rate cut as greater than that of a delayed one, at least in the near term.
“The central bank needs to strike a balance between stabilizing inflation and the persistent risk of household debt. We believe the BOK rate cut in the fourth quarter will need further inflation stability, as confirmed by the July and August data,” he said. “However, the subsequent rate cut cycle is likely to be shallow. We anticipate a total cut of 75 basis points by the end of 2025.”
LG Economic Research Institute research fellow Cho Young-moo said the Fed cut now remains the primary variable.
“BOK will not be able to lower the key rate before the Fed, stifled by the weak Korean currency and record rate differentials with the U.S.”
The Korean currency traded at 1,378.80 won against the U.S. dollar, as of 3:30 p.m., Thursday, gaining 5.9 won from the previous session. The KOSPI ended at 2,888.29 points, up 0.71 percent from a day earlier.