Bank of Korea opens door to rate cuts as growth risks exceed inflation

By Cynthia Kim and Jihoon Lee

SEOUL (Reuters) – South Korea's central bank left interest rates unchanged on Thursday but renewed expectations of an imminent easing of its monetary policy. Some economists expect monetary easing to come as early as October as concerns about economic growth overshadow inflation worries.

The Bank of Korea (BOK) left its key interest rate at 3.50 percent in a unanimous decision, a result that 38 of the 40 economists surveyed by Reuters had expected.

However, Governor Rhee Chang-yong said four of the bank's seven voting members were open to a rate cut within the next three months.

In its decision statement, the BOK said the bank must now “examine the right timing for interest rate cuts while maintaining a restrictive monetary policy.”

As price pressures ease and the economic recovery stalls in the second quarter, economists expect the BOK to move away from its demand-curbing policy.

This could mean that the central bank will cut interest rates at its next meeting on October 11. Around the same time, the US Federal Reserve is expected to decide on its first interest rate cut in four years.

“If you just look at inflation, we are heading toward the right conditions for rate cuts,” Rhee said at a press conference.

South Korea's three-year government bond futures extended their gains after Rhee expressed expectations in a press conference that interest rates would now fall.

“It was neutral to moderate,” said Paik Yoon-min, an analyst at Kyobo Securities, who expects a cut in October.

“Markets had expected about three board members to be open to a near-term rate cut, but there were more. Rhee made it clear that inflation and economic conditions justify a cut, so concerns about financial stability are the main reason for caution today.”

The BOK has also lowered its growth and inflation forecasts for this year.

The 2024 economic growth forecast was cut to 2.4% from 2.5% after Asia's fourth-largest economy unexpectedly contracted in the second quarter. Consumer inflation is now expected at 2.5% this year, lower than the 2.6% previously expected.

The prospect of a rate cut in October comes at a time when other BOK central banks around the world are winding down their aggressive monetary policies of recent years and central banks in Canada, New Zealand and the eurozone have all eased their monetary policies.

While concerns about slowing consumption are now replacing worries about inflation, worries about financial stability and household debt continue to dominate policy considerations in South Korea.

Rising housing prices in Seoul came into focus earlier this month when the government announced plans to increase housing supply to curb rising prices.

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“Board members have made it clear that they will not pump excessive liquidity into the market as this could lead to rising property prices,” Rhee said, adding that lending rules would need to be further tightened to slow the rise in household debt.

(Reporting by Cynthia Kim, Jihoon Lee; Editing by Sam Holmes)