Bank of Korea to stay Thursday, first rate cut seen in October: Reuters poll By Reuters

By Veronica Dudei Maia Khongwir

BENGALURU (Reuters) – The Bank of Korea will keep its key interest rate at 3.50 percent on Thursday and cut it next quarter after the U.S. Federal Reserve is likely to start easing in September, according to a Reuters poll.

The benchmark rate was at 3.50% from January 2023. With inflation rising 2.6% in July from an 11-month low of 2.4% in June, moving further away from the central bank’s 2% target, the BOK may need to set prices. before starting to ease the policy.

The Korean won, which has lost more than 3% against the dollar this year and is one of the worst-performing emerging market currencies in 2024, was also likely to prevent the BOK from going ahead with its first interest rate cut The US Federal Reserve, which is to be expected. to come in September.

A large majority of economists, 38 out of 40, in the Aug. 13-19 survey expected the central bank to keep its key rate unchanged at 3.50 percent on Aug. 22. The other two predicted a 25 basis point cut to 3.25%.

Although two board members said in July they were open to interest rate cuts, economists warned that such a move could exacerbate rising house prices in Seoul, raising concerns in a country with one of the highest rates of of the world between household debt and GDP, at 104.3% in the first quarter.

“BoK will continue to signal a more accommodative stance, albeit cautiously, given lingering concerns about rising house prices and associated risks to financial stability,” wrote Krystal Tan, economist at ANZ Bank.

“Our base case is still for the BoK to start its rate easing cycle in October, following a likely Fed pivot in September. The government is also set to tighten debt service ratio regulations from September, which should help limit the rise in household debt. “

Median forecasts showed no change in interest rates this quarter, but predicted a 25 basis point cut to 3.25% in the October-December quarter. That outlook was largely unchanged from a July survey.

Among economists who provided an outlook through the end of 2024, 27 forecast the rate to be 3.25%, while eight predicted 3.00%.

“We think the BOK will cut rates in October, with higher-than-expected inflation, it’s not urgent…let’s cut it as soon as August. Also, house prices in Korea (are) actually quite high in this moment,” said Kelvin Lam. , senior economist at Pantheon Macroeconomics.

The BOK cited rising household debt and rising house prices as key factors it is monitoring before opening the door to rate cuts. Home price gains accelerated in July, with prices in Seoul rising the most in four years.

Over the course of next year, the BOK was expected to cut rates by another 75 basis points, taking the interest rate to 2.50 percent by the end of 2025, the survey said.