(Bloomberg) -- The Bank of Korea is widely expected to extend its policy holding pattern this week as authorities weigh the risk that signaling a pivot might spur an increase in household debt and threaten efforts to maintain financial stability.
The South Korean central bank will hold its benchmark interest rate at 3.5% for a 13th time when the board convenes on Thursday, according to 21 of 22 economists surveyed by Bloomberg. The lone economist looking for a change predicted a quarter-basis-point cut to 3.25%, a move that many others now see coming in October.
The BOK has held its policy rate steady since January last year, making the current holding pattern the longest since the bank adopted a new benchmark tool in 2008. A resurgence in household debt and a sliding currency have raised concerns about easing too soon, while an export rally led by semiconductors has persuaded authorities that the economy can withstand the current policy settings, which they consider restrictive.
The BOK will meet against a backdrop of conflicting economic signals. While inflation has generally cooled enough to soothe concerns over prices, the rise in mortgage loans has troubled officials. Consumers increasingly comfortable with borrowing costs are snapping up apartments in Seoul on expectations that a shortage of homes will deepen.
An increase in construction costs, tighter conditions for securing loans and a decline in construction starts have stirred concerns that a supply crunch looms, fueling housing demand. Last week, apartment prices in the Seoul area saw the biggest weekly gain since September of 2018.
“In light of early signs of re-leveraging in housing markets in the Seoul metropolitan area, many in the MPC will likely want to wait until tighter macroprudential measures on mortgage lending take hold,” said Goldman Sachs economists led by Goohoon Kwon.
Rising home prices in Seoul is a particular concern for board members, with one member expressing regret at last month’s meeting that the country’s economy has not sufficiently “de-leveraged” during the period of tight monetary policy. With the bulk of the nation’s private wealth tied to real estate, home prices are a key source of worry for South Korean policymakers. The government earlier this month announced steps to boost housing supply in the greater Seoul area.
An economy that appears to be cruising toward the mid-2% target is another factor encouraging the BOK to keep policy steady. South Korea’s exports have maintained solid growth momentum this year with semiconductors leading the way. The BOK expects a global chip rally to be sustained through the first half of next year.
What Bloomberg Economics Says...
“South Korea’s economy is about to get a second-round lift from hot demand for AI technology. So far, much of the boost has come from a surge in chip exports and a wider trade surplus. The next step will be an increase in semiconductor production and pickup in investment to expand capacity.”
-Hyosung Kwon, economist
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Fueled in part by the weak won, the export rally may continue to keep earnings robust, supporting employment and consumption on the domestic front.
While the won has extended gains over the past five days to trade around its strongest level since March, the currency remains more than 3.5% weaker against the dollar and among Asia’s worst performers in 2024.
Meanwhile, investment is a point of concern. Such spending declined last quarter from the previous three-month period, contributing to a quarterly contraction in gross domestic output.
Policymakers have downplayed the setback, saying the underlying momentum of the economy remains intact. Despite the unexpected shrinking of the economy, the BOK is unlikely to revise its growth forecast for 2024, according to Bum Ki Son, a Barclays Bank economist.
“For now, the BOK’s approach to the first cut is likely to be ‘no rush,’” he said. “While the BOK opened the door to a pivot at the July meeting, its renewed focus on macro leverage and financial stability concerns are unlikely to allow the bank to firm up expectations of an October cut at this meeting.”
Since the BOK’s July meeting, South Korea’s policy-sensitive three-year bond yield has fallen nearly 25 basis points, pricing in expectations for at least one rate cut this year. Swaps markets currently price in a quarter-point cut at some time in the next six months.
Waiting too long for the property market to cool down has its share of risks as small businesses and developers struggle under elevated borrowing costs. Fears about a recession in the US contributed to financial market turmoil earlier this month.
The state of the US economy will figure high as a topic at Jackson Hole later this week when Federal Reserve Chair Jerome Powell speaks. The trajectory of US monetary policy is a key consideration for the BOK, as the exchange rate is heavily influenced by the rate differential between the two countries. The Fed is widely expected to start its policy pivot in September.
Some Korean lawmakers, including Yoon Sang-hyun of the ruling party, have called on the BOK to conduct early rate cuts starting this week. Former senior deputy governor of the BOK Lee Seung-heon said earlier this month that such political pressure can have the unintended effect of uniting the board in opposition to preserve the integrity of its independence.
The board last month made a unanimous decision to hold the rate, striking down speculation there would be a dissenter paving the way for a cut in August.
At the same time, the number of members who saw the potential for a quarter-point cut in the next three months increased to two from one, suggesting the door to a pivot was gradually opening a little wider.
“Considering the number of members open to 3.25% rose to two last month, we may see a dissenter at this August meeting,” said Ahn Yea-ha, analyst at Kiwoom Securities Co. She expects the BOK to adopt a wait-and-see approach until the Fed makes a move with its own policy in September.
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