The Bank of Korea will convene the year's first regular meeting of the the Bank of Korea's monetary policy committee on the 15th to decide the base rate. All 10 domestic securities macro and bond experts told ChosunBiz that the Bank of Korea (BOK) will keep the base rate unchanged at the current 2.5% per year. They said cutting the base rate now could further accelerate the recent rise in the won-dollar exchange rate and dwellings prices.
Previously, the Bank of Korea (BOK) cut rates twice by 0.25 percentage point each in February and May last year, then held them steady for four consecutive meetings in July, August, October and November.
◇ "Exchange rate rise, overheated real estate... rate cut could make it worse"
Experts analyzed that a base rate cut could drive a further rise in the won-dollar exchange rate, so the Bank of Korea (BOK) will proceed cautiously. Last year, the won-dollar exchange rate averaged 1,422 won, surpassing 1998 (1,395 won), when there was a foreign exchange crisis, to reach an all-time high. The exchange rate has inched up this year as well and is moving in the upper-1,450-won range.
Koo Yun-cheol, Deputy Prime Minister and Minister of the Ministry of Economy and Finance, said at a market conditions review meeting on the 8th, "Volatility in the foreign exchange market remains high," and noted, "Since the current exchange rate is out of line with fundamentals, it is important for the authorities to continue firm and consistent policy efforts."
If the Bank of Korea (BOK) lowers rates, the rate gap with the United States widens. The current U.S. base rate is 3.50%–3.75% per year. As a result, foreign capital may move from Korea to the United States in search of relatively higher interest rates. A weaker won pushes up import prices, feeding consumer price inflation. Due to the high exchange rate, consumer price inflation rose into the 2% range from September to December last year.
The continued rise in dwellings prices is another factor that makes a rate cut difficult. According to the Korea Real Estate Board (REB), in October last year the sales price index for apartments, row houses and detached houses in Seoul rose 1.19% from the previous month. The increase was the highest since September 2018. Cutting rates at such a time would lower lending rates and could drive more money into real estate.
◇ Will rates be cut within the year... six say "one cut," four say "hold"
Experts were split on whether the Bank of Korea (BOK) will further cut the base rate within the year. Six out of 10 experts expected the Bank of Korea (BOK) to cut rates once (by 0.25 percentage point) this year. Of them, one expected a cut in the first half and five in the second half. They analyzed that with the domestic economy likely to show a high-first-half, low-second-half pattern, a rate cut to support growth may be needed.
By contrast, the remaining four projected the Bank of Korea (BOK) will hold rates steady throughout the year. Yoon Yeo-sam, a research fellow at Meritz Securities, said, "Growth of 2%-plus is expected this year, so an additional cut will not be easy even from the standpoint of economic fundamentals." Of the four, three saw a rate cut as possible next year, while the other projected an extended holding stance.