BNP Paribas "Korea's Base Interest Rate to be Cut Only in 2024"

Economic Growth Stalls Due to Export and Private Consumption Slowdown
Household Financial Risks Also Rise... Inflation Continues
Tightening Policy Stance Maintained... Interest Rate Cuts From the Year After Next

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] It is projected that South Korea’s base interest rate may only be lowered in 2024. With export and private consumption slowing next year, economic growth is expected to falter, while inflationary pressures remain, indicating that the monetary policy, which has shifted to tightening, will not change direction immediately next year.

On the 5th, economist Jiho Yoon of BNP Paribas revealed this outlook in the "2023 South Korea Economic Forecast." He diagnosed that growth is being pressured by domestic and international headwinds. Economist Yoon explained, "As downside risks to growth become more concrete, the output gap (the difference between real GDP growth and potential growth rate) could turn negative in the second or third quarter of next year," adding, "We expect headwinds both overseas and domestically due to a slowdown in private consumption, investment, and export activities." However, he noted that the persistence of service and non-durable goods private consumption and an improvement in China’s economic situation in the next 6-12 months could help domestic growth.

He also anticipated that financial stability risks for households will increase further. Entering a tightening phase will increase the debt repayment burden on households. In particular, the possibility of a decline in real estate prices could amplify these risks. Additionally, financial institutions may face losses in household and corporate loans due to rising default rates, he warned.

Meanwhile, inflation is expected to slow down but continue. The consumer price index growth rate is forecasted to ease from 5.1% this year to 3.5% next year. Economist Yoon analyzed, "Due to rising consumer inflation expectations, broad-based price increases across headline and major products, price hikes in public utilities and transportation, and the pass-through effect of exchange rates on prices, the 2023 consumer price inflation rate will exceed the Bank of Korea’s initial target of the 2% range."

He predicted that the South Korean government will maintain a tightening stance on monetary and fiscal policies. Economist Yoon stated, "To control inflationary pressures, monetary policy is expected to remain limited through 2023, and a base interest rate cut will only be possible in 2024," adding, "The current administration will maintain a conservative fiscal policy stance, supporting strict adherence to fiscal rules." He further added, "Considering recession concerns, an additional supplementary budget in 2023 is possible, but its likelihood and scale will be smaller than in previous years."