With inflation continuing to slow and household debt remaining high, the Bank of Korea may be compelled to keep the policy rate unchanged at 3.5% during its fifth meeting on Thursday and maintain key policy rates steady throughout the year.
As the inflation rate dropped to a new two-year low of 2.3% in July and neared the Bank of Korea's 2.0% inflation target, financial markets anticipate the end of the Bank of Korea's tightening cycle, which saw interest rates increase by 300 basis points over 17 months.
Although the Bank of Korea expects inflation to rise in the coming months, slowing economic growth and high debt may prevent further rate hikes. However, the Bank may opt to guide market expectations with hawkish remarks to prevent expectations of a rate cut from rising.
A Reuters survey conducted from August 14 to 21 shows that all 43 economists predict the benchmark rate will remain unchanged at 3.50% during the meeting on August 24.
Economist Kong Dong-rak from Daishin Securities noted that since the last rate hike in January, with the consumer price inflation rate gradually nearing the central bank's target of 2%, the pressure on the Bank of Korea to further suppress inflation is weakening, and he expects the benchmark rate to remain at its current level throughout the year.
If concerns over a slowing economy intensify, financial market expectations for a cut in the Bank of Korea's benchmark rate will increase. A quarter of the economists surveyed by Reuters believe there is a significant likelihood that the benchmark rate could be reduced to 3.25% or lower.
Although the Bank of Korea may have ended its monetary policy tightening cycle, most analysts or financial institutions anticipate the Bank will not react to short-term inflation fluctuations or economic slowdowns driven by weak demand.
Economist Paik Yoon-min from Kyobo Securities mentioned, while the Bank of Korea retains the possibility of further rate hikes, he believes the likelihood of actual rate increases is slim. However, if inflation does not significantly deviate from the Bank of Korea's projected path, in a scenario of increasing economic and financial downward pressures, financial market expectations for the Bank of Korea's policy easing may rise.
Most economists forecast at least a 25 basis point rate cut to 3.25% by the first quarter of next year, with other central banks in the region also expected to implement easing policies. The median forecast in the financial market indicates that the Bank of Korea will gradually lower the benchmark rate next year, reducing it to 3.00% in the second quarter and to 2.75% and 2.50% in the third and fourth quarters, respectively.
