2024-04-08 01:35:33
U.S. interest rate uncertainty, wait-and-see approach to high inflation… Reduction expected in July and August
The Bank of Korea’s April Monetary Policy Committee will be held on the 12th of this month. The prevailing view in the market is that the Bank of Korea, in a dilemma, has frozen its base interest rate at 3.5%. If the Monetary Policy Committee ties interest rates again this time, it will be the 10th consecutive freeze.
As expectations of a U.S. interest rate cut are pushed back, weight is being placed on the observation that the market will wait and see until uncertainty about the Federal Reserve’s interest rates decreases. With prices rising again to the 3% range, concerns about household debt, low growth, and real estate PF (project financing) insolvency remain, making it difficult to adjust interest rates.
According to the Bank of Korea on the 8th, the Monetary Policy Committee will hold a regular meeting on the 12th of this month to decide on the base interest rate. At this meeting, Commissioner Cho Yoon-je and Seo Young-kyung, who are classified as representative hawks among the Monetary Policy Committee members, will participate for the last time before the end of their terms.
The Monetary Policy Committee set the base interest rate at 3.5% for nine consecutive times from February to February of this year, with the last increase of 0.25 percentage points in January of last year. There is a high expectation in the market that the Bank of Korea will not change the base interest rate this time either.
The reason why the Monetary Policy Committee cannot lower interest rates is primarily due to interest rate uncertainty due to the booming U.S. economy. The need to lower interest rates has decreased to the extent that the Federal Reserve has raised its forecast for US gross domestic product (GDP) growth to 2.1%, 0.7 percentage points higher than last December (1.4%).
If the Bank of Korea starts to cut interest rates hastily, concerns will grow about a prolonged high exchange rate and capital outflow due to the expansion of the interest rate reversal. The possibility of a U.S. interest rate cut by the Chicago Mercantile Exchange (CME) has now fallen from the 70% range a month ago to the 50% range.
Uncertainty about prices also makes the Bank of Korea hesitate in its attempt to lower prices. The consumer price inflation rate in March was 3.1%, remaining in the 3% range for two consecutive months, while the price of agricultural, livestock and fishery products rose 11.7%, the largest increase in 2 years and 11 months.
The possibility of a decrease in oil supply due to geopolitical disputes in the Middle East and upward pressure on oil prices due to the economic boom in the United States are also increasing price pressure. Brent crude oil has recently surpassed the $90 per barrel level and is expected to exceed $100 in September.
The fact that the increase in household debt, which is considered the biggest detonator of our economy, has not slowed down is also a factor causing hesitation in lowering interest rates. In March, bank mortgage loans recorded 860 trillion won, an increase of 4.7 trillion won from the previous month, rising for the 12th consecutive month. As of February, it is also the third increase in history.
However, it is not easy to raise interest rates. Even though exports are recovering, the possibility of a decline in private consumption has increased due to high interest rates, high inflation, and high exchange rates. The Bank of Korea has drastically lowered its forecast for private consumption growth this year from 1.9% to 1.6%.
There are also high concerns about financial instability due to real estate PF insolvency. Due to Taeyoung Construction’s workout, concerns about a capital financing crunch in the construction industry have grown further. In addition, the discrepancy with the government, which is trying to induce a soft landing in real estate, is also a problem. This is because raising interest rates could lead to financial instability due to a real estate crash.
According to the minutes of the February Monetary Policy Committee meeting, a member of the Monetary Policy Committee said, “Easing austerity can begin when it is sufficiently confirmed that prices are converging to the target level.” Another committee member pointed out that household loans will be “a key variable, along with housing prices, in determining the timing of the pivot (policy change) of the base interest rate in the future.”
In the end, it seems highly likely that the Monetary Policy Committee will again decide to maintain the status quo and show a hawkish signal. Following the January and February Monetary Policy Committee meetings, Bank of Korea Governor Lee Chang-yong tried to block expectations of an early interest rate cut, saying, “It is difficult to cut interest rates in the first half of the year.”
The point to watch is whether the Monetary Policy Committee’s minority opinion on the rate cut emerges. At the February Monetary Policy Committee meeting, an opinion was presented that the possibility of an interest rate cut after three months should be left open through the Korean-style forward guidance that forecasts three-month interest rates despite the unanimous decision by the Monetary Policy Committee to freeze the interest rate.
Most people view the timing of the Bank of Korea’s monetary policy shift as after the U.S. interest rate cut. The opinion is that the Bank of Korea will wait and see without widening the interest rate gap with the United States, and then lower interest rates after the Federal Reserve begins to lower interest rates.
Cho Yong-gu, a researcher at Shinyoung Securities, said, “It is expected that there will be no minority opinions due to the unanimous freeze,” and added, “As the U.S. interest rate cut is expected in July, the Bank of Korea will not begin lowering the interest rate until August.”
Woo Hye-young, a researcher at E-Best Securities, said, “The Bank of Korea’s concerns are deepening as the timing of the Fed’s interest rate cut is being pushed back. The fact that the Fed’s rate cut is likely to be postponed to June or July will make the Bank of Korea hesitate to choose a rate cut.” I saw that.
“The Federal Reserve is expected to cut rates around July, and the Bank of Korea is expected to cut rates as early as July or August,” he said. “The Fed is expected to cut rates three times within the year, and Korea is expected to cut rates twice.”
[서울=뉴시스]
2024-04-08 01:35:33