The process of the Bank of Korea's Monetary Policy Committee implementing a "surprise cut" last month, which defied market expectations, appears to have been challenging. Opinions were divided between concerns about the impact of rate cuts on the exchange rate and the need to lower rates to prevent economic slowdown.
According to the "Minutes of the 22nd Meeting of the Monetary Policy Committee in 2024" released by the Bank of Korea on the 17th, a member of the committee stated, "An additional rate cut could increase foreign exchange market volatility" and noted, "It would be advisable to wait and observe the policy direction of the new U.S. administration, the key rate decisions of major countries, and the foreign exchange market situation before making further cuts."
In explaining this judgment, the commissioner stated, "Rate cuts reduce funding expenses for corporations and households, but when uncertainty dominates the market, corporations and households may delay decisions on investment and consumption" and highlighted, "In a situation where there is significant uncertainty in the institutional sector, it is difficult to predict whether rate cuts will lead to a recovery in domestic demand."
Another Commissioner also noted that "with exchange rate volatility expected to remain high for a considerable period, it is necessary to remain cautious of related risks" and expressed a view to keep rates steady. Regarding future monetary policy, the Commissioner indicated that it would be appropriate to determine the timing and pace of additional rate cuts, taking into account household debt and exchange rate trends, to ease downside risks to the economy and prices.
On the other hand, commissioners advocating for a rate cut focused on the increasing likelihood of an economic slowdown. One commissioner who expressed a view in favor of cuts stated, "Contrary to the surface economic indicators, the sentiment of economic agents is quite weak, and the U.S. policy stance will act as an unfavorable factor for our economy," adding, "It is time for monetary policy to respond to the feeble domestic demand recovery internally and the global economic contraction externally."
Another commissioner noted, "As prices continue to slow down in line with the forecast path and concerns about rising dwelling prices and household debt have decreased, the need to maintain the key interest rate level has diminished," adding, "Given that the future growth rate of the Korean economy is expected to be weaker than initially anticipated, it is appropriate to cut rates at this point."
Another commissioner noted, "The rapid decline in export growth is more pronounced than expected, and domestic demand recovery is also slow," expressing a view in favor of cuts. The commissioner elaborated, "Next year's economic growth rate is expected to be lower than initially anticipated, with increased uncertainty in the forecast path regarding U.S. government economic policies, the economies of major countries, and trends in information technology (IT) exports."
Commissioners who expressed views in favor of cuts forecasted that the impact of the exchange rate on the economy would be limited. One commissioner noted, "While exchange rate increases drive up import prices, the pass-through of exchange rates to prices is lower than in the past, so upward pressure will not be significant," adding, "We will closely monitor changes in exchange rate conditions, domestic and international economies, price trends, and the increase in financial stability risks based on various leading indicators, microdata, and market information."
Another commissioner noted, "While the expansion of interest rate differentials may slightly increase exchange rates, it will not significantly impact our economy," adding, "It is desirable to make decisions on further cuts by observing future trends in prices, the real economy, and domestic and international financial markets."
At the November Monetary Policy Committee meeting, the Bank of Korea held a monetary policy direction meeting and lowered the base interest rate to 3.00% from the previous 3.25%, following a cut in October. This marks the first time in 16 years, since the global financial crisis, when six consecutive rate cuts were implemented between October 2008 (including a temporary Monetary Policy Committee meeting) and February of the following year, that the Bank of Korea's Monetary Policy Committee has implemented cuts for two consecutive occasions.
According to the Bank of Korea, among the six members of the committee besides Governor Lee Chang-yong, those who proposed maintaining rates were Vice Governor Yoo Sang-dae and Commissioner Jang Yong-sung. Vice Governor Yoo is noted for expressing a minority view in the committee for the first time in 20 years since Vice Governor Lee Seong-tae in 2004. Commissioner Jang showed a hawkish (currency tightening preference) stance by again presenting a minority view for keeping rates steady in November, following the one in October.