(Bloomberg) — The Bank of Korea cut its benchmark interest rate after local property markets showed signs of cooling and inflationary pressure eased sharply, allowing authorities to finally shift their focus to supporting economic activity with a cautious policy pivot.
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The central bank lowered its seven-day repurchase rate by a quarter-percentage-point to 3.25% in a decision predicted by 20 of 22 economists surveyed by Bloomberg.
Five members of the board see the rate staying there over the next three months, according to Governor Changyong Rhee, a view that largely wipes out the likelihood of a follow-up rate cut next month and pours cold water on expectations for a move in January. One member opposed Friday’s rate cut decision.
Rhee, speaking at a post-decision briefing, acknowledged the decision was essentially a “hawkish cut.” Markets also reflected that view, with the won strengthening a tad against the dollar.
With its policy pivot the BOK joins a growing wave of central banks changing course to embark on easing cycles in a bid to revive economic momentum now that inflationary pressure has cooled. The Federal Reserve last month cut its key rate by a half-percentage point as ensuring a soft landing for the economy took precedence over its inflation battle.
“The rate cut not only responds to the consumption that’s been lackluster, but also shows the BOK can afford to loosen a bit given the pressure pushing the inflation rate back above 2% appears limited,” said Ahn Yea-ha, analyst at Kiwoom Securities Co. Ahn still forecasts a gradual easing with the BOK holding the rate in November.
Until Friday, the BOK had held the rate at a restrictive 3.5% for more than a year and a half. Policymakers extended the holding pattern in recent months on concerns that any early signals of a pivot might further fuel a rebound in the housing market and threaten financial stability.
The bank cited a “clear trend of stabilization” in inflation, a slowing in the growth of household debt and an easing of currency risks as factors behind its decision, according to a statement. While the BOK said it was slightly moderating its restrictive stance it removed a reference to keeping policy restrictive in its concluding remarks. The bank said it would judge the pace of further rate cuts by assessing prices, economic growth and financial stability.
The rate cut reflects concerns over stagnant private spending and credit risks related to the construction industry. With most borrowers on floating rates, interest expenses have exerted a drag on consumption, prompting some lawmakers to call for the central bank to cut rates.
“Given the prevailing negative sentiment and the Fed’s sizable cut, the market expects faster rate cuts by the BOK to support economic growth and momentum,” Standard Chartered Bank economists Chong Hoon Park and Nicholas Chia said in a note before the decision. “Still, we think negative sentiment on Korea’s economy is overblown, and the BOK is likely to stay cautious on cutting the base rate aggressively as it weighs the risks to financial stability.”
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“With rising home prices in Seoul and growing debt remaining a key concern, we expect this easing cycle to proceed only gradually. Our baseline view is the BOK will hold rates at its November meeting, then resume cuts in the first quarter of 2025.”
— Hyosung Kwon, economist
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The government has sought to rein in housing markets with a pledge to increase home supplies and by rolling out stronger regulations on mortgage loans, moves that may have reassured the central bank that the market would cool. One BOK board member cited those measures in the lead-up to Friday’s decision and Rhee also hailed the efforts at this briefing.
“Monetary easing on a measured pace could also help engineer a soft landing of property markets in a close coordination with financial regulators,” Goldman Sachs analysts Goohoon Kwon and Andrew Tilton said in a note. With moderating export growth and other potential headwinds to the economy, the BOK will likely conduct a quarter-point cut each quarter until the rate reaches 2.5% by the third quarter of next year, they projected.
–With assistance from Yuko Takeo.
(Adds details from Governor Rhee’s press briefing.)
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