MNI BOK WATCH: Governor Maintains Rate Cut Cycle, Board Holds

Bank of Korea Governor Rhee Chang-yong on Thursday highlighted concerns over an overheated real-estate market while reaffirming the bank’s commitment to rate cuts to support the economy, following the board’s 6-to-1 decision Thursday to hold the Base Rate at 2.5%.

“Regarding future monetary policy, the Board considers it necessary to continue its rate-cut stance, in view of prevailing economic conditions,” Rhee said, following the largely expected decision. (See MNI BOK WATCH: Board Likely To Hold, Nov Rate Cut Eyed)  “However, given that risks to the growth outlook have increased on both the upside and downside, and financial stability risks have also heightened, the Board will determine the timing and size of any further cuts in the Base Rate based on incoming economic data.”

The BOK Board’s decision is its third consecutive hold as it takes a wait-and-see approach amid concerns over the real-estate market. One member, Shin Sung Hwan, voted against leaving the rate unchanged, proposing a 25bp cut to 2.25%.

However, Rhee stressed that monetary policy should avoid fuelling expectations of further house-price increases. “As exchange-rate volatility has also increased sharply in a short period, the Board judged that attention should be paid to its possible impact on financial stability,” he said, highlighting concerns over a weaker won that also influenced the policy decision. 

The dollar recently traded around KW1,440.01, hitting its lowest level since April 29.

ECONOMIC CONSIDERATIONS

“Housing price increases and transaction volumes have accelerated again in Seoul and surrounding areas since September,” Rhee warned. “As the government has introduced follow-up market stabilisation measures, it is necessary to closely monitor their impacts, including effects on household debt and exchange rate volatility.”

Despite upward pressure from the exchange rate, inflation is projected to remain around 2%, supported by subdued demand and stable global oil prices. September data showed consumer price inflation at 2.1% and core inflation (excluding food and energy) at 2.0%.

ECONOMIC OUTLOOK

The BOK expects the domestic economy to continue its gradual recovery, with growth for this year and next broadly in line with the August outlook. However, Rhee noted that uncertainties have risen, driven by trade negotiations with the U.S., developments in the semiconductor market and the pace of domestic demand recovery.

“Given that the domestic economy continues to improve while both upside and downside risks remain, it is appropriate to determine the timing of any further Base Rate cuts after more closely assessing developments in these risk factors,” he said.

The BOK Board next meets on Nov. 27.