BOK explores rate cut timing amid slow inflation, rising debts

Economy

Published: 11 Jul. 2024, 10:37 Updated: 11 Jul. 2024, 16:40

BOK explores rate cut timing amid slow inflation, rising debts

Bank of Korea Gov. Rhee Chang-yong bangs the gavel to open a Monetary Policy Committee meeting at the central bank in Seoul on May 23, 2024. [YONHAP]

Korea's central bank indicated a pivot toward a rate cut in a policy statement on Thursday after leaving the benchmark interest rate unchanged for a 12th straight session.

Inflation has been kept at bay recently, but rising household debt remains a major obstacle to a potential rate cut.

“While maintaining a restrictive monetary policy stance for a sufficient period of time, the Board will examine the timing of a rate cut,” the Bank of Korea (BOK) said in the statement. “In this process, the Board will thoroughly assess the slowing trend of inflation and the trade-off between policy variables such as growth and financial stability.”

BOK Gov. Rhee Chang-yong echoed the tone in a Thursday news conference following the rate decision.

“There has been progress in the trend of price stabilization, and things are set for a timely turn,” Rhee said — but the governor also noted that “risky factors” still stand in the way of a trim.

In a widely expected decision, the monetary policy board of the BOK kept its policy rate at 3.5 percent, marking the benchmark's longest unchanged streak.

The central bank has continued to stand pat following rate freezes since February last year after delivering seven consecutive rate hikes from April 2022 to January 2023.

The rate freeze comes as household debt runs high despite an extended restrictive mode and even as inflationary pressure in Asia's fourth-largest economy shows signs of easing, while the country's economy is expected to grow faster than expected this year on the back of robust exports.

Household loans extended by banks rose for the third consecutive month in June, led by a rise in mortgage loan growth, keeping the central bank cautious in cutting rates.

Rhee said earlier this week that the country is expected to see a gradual easing of inflation.

Consumer prices rose 2.4 percent on-year in June, the lowest level since July 2023, and the central bank is expecting inflation to fall further down the road reaching its mid-to-long haul target rate of 2 percent by the end of this year.

The country continued to experience high inflationary pressure last year following the sharpest inflation in decades in 2022.

The rate freeze also comes as the central bank heightened its growth projection for the year.

In May, the central bank jacked up its growth estimate to 2.5 percent for the year, up from its earlier projection of 2.1 percent, but slashed the 2025 growth outlook to 2.1 percent from 2.3 percent. The bank kept its inflation outlook at 2.6 percent for the year.

The Korean economy grew at a higher-than-expected rate of 1.3 percent in the first quarter of the year, aided by continued recovery in exports and a rise in construction investment.

The first quarter expansion beat the market estimate of 0.6 percent and the 0.6 percent on-quarter expansion in the September-December period.

The reading marks the highest since the fourth quarter of 2021, when the economy expanded 1.4 percent.

Last year, the economy expanded 1.4 percent, slowing from the previous year's 2.6 percent gain and the 4.1 percent advance in 2021.

The central bank's rate freeze followed the Federal Reserve's decision last month to hold its benchmark lending rate steady at between 5.25 percent and 5.50 percent for the seventh consecutive time.

Amid easing inflationary pressure, the Fed is expected to start slashing the rate starting in September.

BY PARK EUN-JEE, YONHAP [park.eunjee@joongang.co.kr]