BOK surprises with key rate cut amid economic slowdown, weak exports

Bank of Korea Governor Rhee Chang-yong speaks during a press conference at the central bank in Seoul, Thursday.

Three of the six monetary policy committee members were open to the possibility of further easing within the next three months, as indicated by the forward guidance on the three-month horizon.

 

“A lot has changed over the past month,” BOK Governor Rhee Chang-yong said during a press conference at the central bank in Seoul.

Chief among them is U.S. President-elect Donald Trump’s election victory, followed by a "red sweep," in which the Republican Party gains control of both the presidency and Congress.

“It was well beyond our expectations, sending shockwaves with wide trade implications across the globe,” he said.

Equally concerning was the weaker-than-expected growth in exports during the third quarter, driven by the overall loss of global competitiveness among Korean exporters due to structural factors.

“The two developments are new with far-reaching implications. This led us to revise the goods export growth forecast to 1.5 percent, down from the previous 2.9 percent increase made in August, grounds for additional easing.”

The removed mention of a "cautious approach" toward rate cuts is, in his view, a clear signal of the end of years of post-pandemic tightening.

“The issue now is the timing and the pace,” he said.

The risk of a recession is linked to the two factors in easing, partly determined by whether the key rate falls to the neutral level or lower.

“The monetary policy will shift toward an easing cycle from now on, an end to the past few years of rapid hikes in the key rate put in place to temper inflation. We are not yet at a stage where discussions of a below-neutral rate path should be put on the table. Recent unfavorable developments led us to accelerate the pace of easing,” the governor said.

Rhee countered renewed claims of the central bank "falling behind the curve," a source of ongoing frustration for the Bank of Korea since August.

“We took a pause in August, a decision I am proud of for its timely and significant impact on curbing the then-soaring housing prices and debt buildup. Household debt is expected to remain at around 5 trillion won ($3.5 billion) in November, supported by macroprudential measures and it is likely to decrease further next month.”

The foreign exchange landscape has shifted, a positive for reducing the country's currency volatility, he said.

"Korea is no longer a foreign currency debtor, as evidneced by domestic investors' offshore assets now exceedng the foreign holdings in Korean assets. The currency volatility concern is now more about the pace, rather than a specific level."

Rhee made it clear that he would not run for public office.

“I prepared a note,” he said in response to a question about a potential stint as a prime minister, a topic recently surfaced by local media outlets.

“The challenging economic conditions necessitate me to prioritize my duties as the head of the central bank at the moment.”

Kwon Goo-hoon, senior Asia economist and managing director at Goldman Sachs, said the monetary policy outlook turned more dovish, as indicated by dovish changes in the forward guidance and more focus on downside growth risks.

“We expected a dovish hold with a risk of a surprise cut,” he said. 

“Overall, the November meeting is consistent with our view that the BOK will likely continue to ease to a terminal rate of 2.25 percent, below consensus and current market pricing. We continue to expect gradual easing of 25 basis points each quarter, totaling 75 basis point cuts by summer.”

The most important constraint to further easing has changed from financial stability concerns to exchange rates, as suggested by the rate-setting policy committee statement, Kwon said.

“Currency volatility can be addressed through BOK policy tools, as mediated by the state-owned National Pension Services in hedging its large and growing exchange rate risks.”

This was in reference to June raising of foreign exchange swap limit to $50 billion, from the previous 35 billion, prompted by the plunging of Korean currency to 1,400 won against the dollar at the time.

Park Seok-gil, executive director of JPMorgan Chase Bank Asia Economic Research, said the surprise cut departs from the gradual easing guidance provided in October, responding more immediately to downside pressure on GDP growth brought on by a weaker export growth forecast.

The central bank has also shown a preference for flexibility over predictability in policy changes.

"The opinions within the monetary policy committee, divided between hawks and doves, have become more pronounced," he said.

During previous rate hikes and holds, dissent votes were relatively infrequent, and the differences in views among members were not prominently highlighted in his reading of the meeting minutes. However, priorities among members may diverge, given competing trade-offs between policy objectives and limited policy space.

"We expect two additional 25 basis point cuts in the first and second quarters of 2025," he said. 

"It will converge to the neutral level of 2.5 percent by the second quarter of that year, as opposed to our previous forecast of the third quarter. We tentatively expect the next cuts in February and May next year. Skipping one meeting between future cut actions would allow time to assess the effects of the recent cuts."