The Bank of Korea, which began lowering its benchmark interest rate in October last year, is expected to implement a third consecutive cut. Experts anticipate that at the first Monetary Policy Committee meeting of this year, scheduled for the 16th, the bank will reduce the benchmark interest rate to 2.75% per annum. More than half of the experts forecast that the bank will lower rates two more times afterward, bringing the year-end benchmark interest rate to 2.25%.
According to a survey conducted by CHOSUNBIZ on 12 domestic securities and macroeconomic experts on the 13th, 8 respondents (75%) expect the benchmark interest rate to decrease from the current 3.00% to 2.75% at the Bank of Korea's Monetary Policy Committee meeting on the 16th. If this forecast holds true, it will mark the third consecutive cut after the bank lowered rates by 0.25 percentage points in October last year. The remaining 4 respondents (25%) expect the rate to be held steady.
◇ “As domestic demand weakens and export growth slows, the need for economic stimulus has increased”
Experts predicting a rate cut pointed to the intensifying political uncertainty in the country, including martial law and impeachment, leading to worsening domestic demand. According to Statistics Korea, in the second week of December last year (7th to 13th), the nationwide credit card usage amount decreased by 3.1% compared to the previous year. The Consumer Sentiment Index (CCSI), which comprehensively reflects consumers' perceptions of the economic situation, also recorded a drop of 12.3 points to 88.7 from the previous month, indicating a worsening trend.
The slowdown in the export growth, which had supported the Korean economy, also heightens the need for interest rate cuts. According to the Korea Development Institute (KDI), while the daily average exports in December last year saw a high growth in ICT items (27.9%), other categories (-3.6%) declined due to weak global demand. KDI assessed that the increase in export growth risk and a contraction in economic sentiment have led to the diagnosis that "the downward risks to the economy have increased."
Yoon Yeosam, a research fellow at MERITZ Securities, stated, "As domestic and foreign political turmoil intensifies, the Korean economy's growth rate of around 1% is threatened. Even though domestic demand is contracting, there is high uncertainty regarding the possibility of fiscal policy responses, including supplementary budgets, which has increased the need for currency policy easing."
Experts predicting a freeze in rates are focusing on the potential delay in the pace of interest rate cuts in the United States. If Donald Trump implements universal tariffs (imposing tariffs of up to 20% on imports) after taking office as U.S. president, this could raise U.S. import prices and consumer prices. As a result, the Federal Reserve's pace of interest rate cuts could slow, making it difficult for the Bank of Korea to lower its rates while monitoring the interest rate differential.
The recent surge in the won-dollar exchange rate is also a source of concern. According to Seoul Foreign Exchange Brokerage, the weekly closing price of the won-dollar exchange rate on the 9th was recorded at 1460.5 won, surpassing 1450 won for the 13th trading day since December 19 last year (1451.9 won). The rapid rise in the exchange rate could worsen key financial stability indicators such as the capital adequacy ratio and liquidity indicators like the Liquidity Coverage Ratio (LCR) of the Bank for International Settlements (BIS), triggering financial instability.
Lim Jae-kyun, a research fellow at KB Financial Investment, commented, "In a situation where domestic and foreign political uncertainties exist due to Trump's inauguration, even if rates are cut, the effects may not be significant," adding, "Concerns about the exchange rate suggest that financial stability may take precedence over stimulating the economy."
◇ 58.3% of experts predict the year-end rate will be 2.25%… additional rate cuts in the second quarter
All of the surveyed bond market experts expect multiple interest rate cuts to occur after January. Given the concerns about economic sluggishness and the potential for increased protectionism following Donald Trump's election, the Korean economy may be vulnerable to impacts. The ongoing rate cuts by major central banks, including the European Central Bank (ECB), also enhance the likelihood of further cuts.
However, opinions diverged on the year-end interest rate level. Among the 12 bond market experts, 7 (58.3%) predicted it would be 2.25%. Assuming a cut of 0.25 percentage points each time, they believe there will be a total of three cuts this year. Four experts (33.3%) expect the Bank of Korea will cut one less time, resulting in a benchmark rate of 2.50%. The remaining expert (8.3%) predicts a final rate of 2.00% (four cuts).
Moon Hong-cheol, a researcher at DB Financial Investment, who predicted 2.25%, stated, "The year-end interest rate level is expected to decline due to price stability, domestic recession, interest rate cuts for economic revitalization, and global growth slowdown," adding, "Although high exchange rates make currency easing challenging, it seems that the focus will be on responding more closely to the domestic recession." He added, "I expect the timing of rate adjustments after January to be in the second quarter."
Jo Yong-gu, a researcher at Shin Young Securities, who suggested 2.50%, stated, "Basically, I expect a cut once in the first and second quarters, leading to an year-end benchmark rate of 2.5%." He also noted that the timing of the second cut is likely to align with the budget execution after the supplementary budget is prepared to alleviate the impact of government spending in terms of policy coordination.
Yoon Yeosam, the only one to mention a rate of 2.00%, stated, "Given the circumstances where Korea's neutral interest rate median has lowered to the mid-2% range and considering the sluggish growth in the 1% range and inflation below the target level of 2%, I believe the benchmark interest rate should be cut to 2.00%."