By Veronica Dudei Maia Khongwir
BENGALURU (Reuters) – The Bank of Korea (BOK) will keep its policy rate on hold at a 15-year high of 3.50% on Thursday, but was expected to cut the rate next quarter – around the same time as a likely start of policy easing by the U.S. Federal Reserve, a Reuters poll found.
With inflation cooling to an 11-month low of 2.4% in June, but remaining above the central bank’s 2% target, and with the Korean won weakening by more than 6% against the U.S. dollar this year, the BOK has little room to adopt a dovish stance.
All 40 economists in the July 3-8 Reuters poll expected the BOK to leave the base rate unchanged at 3.50% on July 11.
“We saw the June CPI growth drop to 2.4%, but I believe July numbers will be edging up. If the BOK decides to cut ahead of the Fed, the Korean won will weaken further and that will put some pressure on inflation later,” said Stephen Lee, chief economist at Meritz Securities.
“The most comfortable choice the BOK can make is to see inflation stabilising below 2.5% for about two consecutive months and see the Fed cutting their interest rate before going for their first cut in October.”
Median forecasts showed interest rates will remain unchanged through next quarter before a 25 basis-point cut to 3.25% in the final three months of the year. In a May survey, the consensus view predicted a 50 basis-point cut.
Among economists who provided an outlook until end-2024, 24 forecast it at 3.25%, 15 said 3.00%, with Pantheon Macroeconomics being the only participant predicting the base rate to remain steady at 3.50%.
“We still believe that the BOK’s first rate cut will come in October, as household debt has reaccelerated in recent months and upside risks to inflation remain high,” noted Min Joo Kang, senior economist at ING.
“Inflation will likely pick up again in July as the fuel tax cut reduces and some local public services fees are set to rise. However, if July inflation turns out to be lower than expected, then the probability of a cut in August will increase.”
South Korea’s household debt is among the highest globally, making prolonged high interest rates painful and potentially leading to an economic downturn.
But economists in the poll expected South Korea’s economic growth to improve this year, averaging 2.5% in 2024 and 2.2% in 2025, up from 1.4% last year. Those expectations were in line with BOK estimates.
Inflation was forecast to average 2.6% and 2.1% this year and next respectively.
(For other stories from the Reuters global economic poll:)
(Reporting by Veronica Dudei Maia Khongwir; Polling by Devayani Sathyan and Rahul Trivedi in Bengaluru and Jihoon Lee in Seoul; Editing by David Holmes)
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