September 09, 2024

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Bank of Korea Gov. Rhee Chang-yong speaks at a press conference held at the policy bank's headquarters in central Seoul, July 11. (Joint Press Corps-Yonhap)

The US Federal Reserve's signal for a key rate cut has paved the path for the Bank of Korea to embark on an interest rate-cutting cycle soon, as surging household debts and currency volatility remain a concern.

While keeping the benchmark rate unchanged at a range of between 5.25 and 5.5 percent, US Fed Chair Jerome Powell hinted the Fed could bring down the rate soon, saying “a rate cut could be on the table at the September meeting," on the condition the US economy follows its expected path.

Fueled by the anticipation of the Fed’s rate cut, the South Korean won opened at 1,368 against the US dollar on Thursday, strengthening by 1.8 won. It was the first time the figure entered the 1,360 won range during intraday trading since June 13.

Seoul shares opened higher on Thursday, backed by the projection. The benchmark Kospi stood at 2,789.51 as of 2:15 p.m., gaining 18.82 points or 0.68 percent. It opened at 2,787.3, and even hit as high as 2,793.4 points during intraday trading as of press time. The secondary bourse Kosdaq traded at 815.13 at 2:15 p.m., gaining 11.98 points, or 1.49 percent.

With the US rate freeze, the interest rate gap between Korea and the US remained at an all-time high of 2 percentage points. The BOK has been keeping the key rate steady at 3.5 percent for more than a year and a half. A widened rate gap is associated with concern about currency volatility in Korea.

While rising prices have remained a hurdle for the BOK to begin its rate cut, the inflationary pressure has been easing off in recent months, figures showed.

The country’s consumer prices rose by 2.4 percent on-year in July. The figure has stayed in the 2 percent range for the past three months. Local authorities expect the consumer price growth to fall to the target level of 2 percent within this year.

Yet surging household debts remain a concern.

The outstanding value of household debt taken out at local banks surged by 6 trillion won ($4.4 billion) per month as of end-July. The figure has been on the rise for three straight months, led by a surge in housing mortgage lending.

Market experts viewed the BOK could start to cut its key rate in October.

“The US Fed will begin its first rate cut in September and bring down the rate by 0.25 percentage point twice this year, while the BOK will cut its rate once by 0.25 percentage point in October,” analyst Ahn Ye-ha of Kiwoom Securities viewed.

“Both countries will exercise a rate cut at a limited level as the cuts aim to ease the inflation-battling monetary tightening environment, rather than preventing an economic slowdown.”

This year, central banks of major economies have taken a turn in their monetary policy stance, or have signaled a pivot.

The European Central Bank cut its rate by 0.25 percentage points in June for the first time in nearly five years. In July, it held the rate steady. The Bank of Japan began its rate-hike cycle in March and raised the base rate by another 0.25 percentage point on Wednesday.

Local authorities continued to keep a cautious stance on Korea’s monetary policy in an attempt to settle the excited market.

"Though the Fed has indicated a possibility of a changeover in its monetary policy stance, uncertainty lies in the timing and the range of the cut," BOK Deputy Gov. Ryoo Sang-dai said.

Ryoo further stressed the BOK will continue to closely monitor the risks of financial stability including the rise in housing prices led by the Seoul metropolitan area, a surge in household debts and escalating volatility in the financial market.

By Im Eun-byel (silverstar@heraldcorp.com)