Bank of Korea’s Rhee Seeks to Curb Moves Based on Rate Cut Hopes


(Bloomberg) -- Bank of Korea Governor Rhee Chang-yong sought to rein in market moves based on assumptions of a near-term policy pivot as the board extended its record-long holding of interest rates.

“Market expectations for a cut are somewhat excessive,” Rhee said at a news briefing after the board unanimously decided Thursday to keep the seven-day repurchase rate unchanged at 3.5%, matching the forecast of all 22 economists surveyed by Bloomberg.

While the BOK laid the groundwork for a rate cut by specifically referring to a need to examine the timing of a reduction, Rhee said the goal of safeguarding financial stability has taken on a greater urgency as markets from real estate to sovereigns “get ahead of themselves” with their anticipation of a policy loosening. 

South Korea’s markets have been pricing in a rate cut since May when the BOK held its inflation projection unchanged, even as it sharply raised its outlook for economic growth. 

That’s kept pressure on the won against the dollar, pushing up import prices. The expectation that rates will come down and property will appreciate has already bumped up prices in some neighborhoods close to their previous highs, stoking appetite for loans among households.

Three-year and 10-year bonds ticked up a fraction to 3.17% and 3.23% respectively, while the Kospi equity benchmark remained up around 0.5%. The won was largely steady throughout the briefing, trading 0.3% higher against the dollar at 1,379.55.

“The BOK seemed surprised by the pickup in household debt and house prices,” said Woo Hye-young, fixed-analyst analyst at LS Securities Co. Woo sees the need for a correction in the local bond market as the BOK delivers only one rate cut this year, in October.

The governor said the bank was preparing to “switch lanes” on policy, but didn’t want to box itself into the timing of the move. In a separate policy statement, the BOK said it would examine the timing of a cut while keeping its stance restrictive.

The board stayed united behind Rhee with the vote to extend the holding pattern to the longest since 2008 when the bank had adopted a new benchmark rate. Still, two members softened their outlook by saying they were open to a cut in the next three months. Four expected to see the rate staying the same while Rhee didn’t express his own view.

“We’re growing confident inflation will converge to the target, but it’s hard to tell when rate cuts will begin,” Rhee said, pointing to rising home prices as an example of market players jumping the gun on rate-cut hopes, something he and the board did not want to encourage.

The BOK has long said it would consider easing policy once it has enough confidence inflation will continue moving toward its 2% target. In June, consumer price growth eased to 2.4% from a year earlier, well below Bloomberg’s projection of 2.6%, in a trend welcomed as positive by the BOK. The sharper-than-expected slowing had fueled bets that a rate cut will come as early as next month.

An early cut in August could support efforts for debt restructuring expected to begin in earnest in the real estate sector in the second half of the year. It might also relieve concerns about credit market volatility.

Governor Rhee has also been under pressure in recent weeks from lawmakers, including Song Eon-seog, a ruling party member who called for a rate cut in July to shore up small businesses and prevent the economy from losing momentum.

If the BOK waits until October and then cuts again in November, it could appear to be rushing then, inadvertently adding to market volatility, Kang Seung Won, an analyst at NH Investment & Securities, said before the news conference. Earlier is better if the bank wants to pace itself in softening policy for the remainder of the year, he said, pointing out slower inflation in South Korea than in other developed countries.

In the US this week, Federal Reserve Chair Jerome Powell continued to show a cautious stance over policy easing, calling for more data to be confident inflation is trending down. That suggests the dollar will continue to keep the won in a weak spot for the time being.

“Financial market stability is a primary BOK concern and premature cuts could destabilize markets,” Standard Chartered Bank Korea economists, including Chong Hoon Park, said in a note before the decision. They expect a rate cut in October.

The BOK was among the first central banks to start raising borrowing costs to exit from pandemic-era stimulus and has a track record of moving ahead of the Fed in changing policy direction.

The bank can afford to wait longer as economic growth continues to pick up on an export rally led by semiconductors used in artificial intelligence and the labor market stays tight with the jobless rate below 3%.

“Rhee was obviously concerned about financial imbalances given his remarks on market expectations being excessive,” said Shin Earl, head of fixed-income strategy at Sangsangin Investment & Securities Co. The “contradiction” between inflation and financial stability is likely to delay the timing of the BOK first rate cut to October from August, he added.

--With assistance from Youkyung Lee.

(Adds more details from Rhee’s press conference, economist comments)

©2024 Bloomberg L.P.

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