[Geumtongwipol]② "Korea-US, Interest Rate Cut in Q1 Next Year"... Biggest Variable is 'Real Estate'

Asia Economy, Survey of 24 Domestic Experts
Despite Recent US Tightening, Interest Rate Cuts Expected Early Next Year
Economic Concerns Inevitable if Year-End Inflation Slows
Biggest Variable is 'Real Estate'... Factors Affecting Interest Rate Fluctuations

Many domestic experts expect that South Korea and the United States will begin cutting their benchmark interest rates in the first quarter of next year. Although Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), recently hinted at two more rate hikes within this year, if the inflation stabilization trend is further confirmed around the end of the year, both countries are expected to inevitably shift to rate cuts early next year to prevent excessive economic recession.

The biggest variable for domestic monetary policy going forward was most frequently cited as the 'real estate market.' If the real estate market slowdown intensifies issues such as reverse jeonse (key money deposit) problems and concerns over Saemaeul Geumgo’s insolvency, rate cuts could accelerate to reduce economic burdens. However, if housing prices rebound and household loans increase significantly, there is a strong possibility that the tightening stance could last longer than expected.

Experts: "South Korea and U.S. to Start Rate Cuts in Q1 Next Year"

According to a survey conducted by Asia Economy from the 4th to the 7th of this month targeting 24 domestic and international securities analysts and economic research institute researchers, the largest number of experts chose 'Q1 next year' as the timing for benchmark interest rate cuts in South Korea and the U.S., with 10 experts for Korea and 14 for the U.S.

Ahn Jae-kyun, an economist at Shinhan Investment Corp., said, "Both South Korea and the U.S. are expected to begin cutting rates in the first quarter of next year," adding, "As the effects of monetary tightening aimed at stabilizing inflation since 2021-22 are confirmed, the need to moderate the extent of economic downturn will become more prominent from the end of this year to early next year."

Since both South Korea and the U.S. are currently maintaining high-intensity tightening monetary policies, if the inflation stabilization atmosphere deepens, there is a high possibility of adjusting the tightening intensity, with the first quarter of next year being the most likely timing. Earlier, Lee Chang-yong, Governor of the Bank of Korea, also said at a press briefing last month reviewing inflation target operations, "If there is evidence that the inflation rate sufficiently converges to the 2% range by the end of the year, rate cuts can be considered."

For South Korea, the outlook for the timing of rate cuts was evenly split between Q4 this year and Q2 next year, with seven experts each. Since South Korea showed a clearer stabilization trend compared to the U.S., with consumer price inflation falling to 2.7% year-on-year last month, many believed rate cuts could come sooner within this year. However, there was also a strong view that rate cuts would only begin in Q2 next year after confirming the U.S. rate cut stance.

Yoon Seok-jin, a researcher at Hana Financial Management Research Institute, said, "As signs of economic slowdown become more pronounced toward the end of the year, discussions on Fed rate cuts are expected to begin," adding, "Domestically, due to export recovery supported by semiconductor industry improvements in the second half, the downside risk to the economy is relatively low in the short term. Therefore, after confirming U.S. rate cuts, a gradual normalization of tightening through rate cuts in Q2 next year is expected."

On the other hand, the outlook for the U.S. rate cut timing showed a clear second peak in Q2 next year (7 experts) after Q1 next year. Only three experts expected rate cuts in Q4 this year, unlike Korea. This is attributed to the still strong U.S. labor market and the Fed’s repeated preference for tightening.

Fed Chair Powell said at the annual central bank governors’ meeting held in Portugal at the end of last month that rates are "not yet sufficiently high" and that "we do not rule out taking consecutive actions at each meeting." This was interpreted as meaning that the Federal Open Market Committee (FOMC) could raise rates at both the July and September meetings, raising expectations that the U.S. tightening stance will continue for a considerable period.

'Inflation → Real Estate'... The Biggest Variable in Changing Monetary Policy

Among the biggest variables (multiple choices allowed) that could affect the Bank of Korea’s monetary policy going forward, 10 experts chose the 'real estate market' as the most significant.

In a survey conducted by Asia Economy ahead of the Monetary Policy Committee meeting in May, among 20 respondents, 13 chose 'consumer prices' as the biggest variable, while only one expert selected 'real estate and financial stability.'

Considering this, concerns about inflation have weakened significantly over the past two months, while issues related to real estate such as reverse jeonse, financial sector instability, and household loan expansion have become more prominent. In fact, the recent domestic consumer price inflation rate has shown a relatively stable trend, consistent with the Bank of Korea’s forecast that inflation would slow to the 2% range in June-July and fluctuate around 3% until the end of the year.

Experts explained that real estate issues could act as both upward and downward factors for the benchmark interest rate. This means that it is difficult to make a clear judgment on the direction of the real estate market’s recession or recovery, and its ripple effects are uncertain.

Recently, Seoul apartment prices have continued to decline based on KB Real Estate’s weekly survey, putting pressure on the jeonse market. According to a Bank of Korea report, the proportion of households at risk of reverse jeonse among existing jeonse contracts increased significantly from 25.9% (517,000 households) in January last year to 52.4% (1,026,000 households) in April this year.

In particular, the outstanding loans to construction and real estate-related companies at Saemaeul Geumgo, which recently sparked a bank run controversy, approached 56.4 trillion KRW as of the end of January this year. Although concerns about real estate project financing (PF) instability in the financial sector have eased significantly compared to the end of last year, unsold properties in local areas remain severe, so it is still too early to be complacent about real estate-driven financial instability.

Researcher Yoon Seok-jin pointed out, "Since real estate accounts for a large portion of household assets in South Korea, the impact of the real estate market on the economy is very high," adding, "The longer the tightening stance continues, the greater the burden of risks such as reverse jeonse and real estate PF risks, making it the biggest variable going forward."

DB Financial Investment researcher Moon Hong-chul also said, "We need to be cautious about the possibility that real estate PF issues could escalate and trigger financial instability." This suggests that the Bank of Korea could quickly shift to a monetary easing stance to prevent real estate-driven jeonse and financial instability.

Lee Chang-yong, Governor of the Bank of Korea, is answering reporters' questions at the '2023 First Half Price Stability Target Operation Status Review Briefing' held on the 19th of last month at the Bank of Korea podium in Jung-gu, Seoul. Photo by Joint Press Corps

Housing Price Rebound and Household Loan Increase... Possibility of Prolonged Tightening

Conversely, as Seoul apartment prices have recently shown signs of recovery and household loans such as mortgage loans are increasing again, many believe it will be difficult for the Bank of Korea to return to an easing stance for a considerable period.

Heo Jeong-in, a researcher at Daol Investment & Securities, said, "If the real estate market improves and household loan amounts increase rapidly again, the Bank of Korea may consider one more rate hike."

Economist Ahn Jae-kyun said, "If additional household debt increases are confirmed, the Bank of Korea’s tightening stance may continue beyond Q1 next year," but added, "However, considering ongoing pressures on real estate market financing such as PF and financial system instability, it is expected that additional hikes will be more difficult than cuts."

Other key variables expected to significantly influence domestic monetary policy include the pace of inflation slowdown in the U.S. (9 experts), the KRW-USD exchange rate trend (7 experts), and economic growth rate (5 experts).

Lim Je-hyuk, a researcher at Meritz Securities, said, "In the U.S., labor supply is expanding smoothly mainly among the 25-54 age group (prime age), easing tightness in employment, but it is necessary to confirm stabilization trends," adding, "If additional tightening shocks occur in the U.S., uncertainty in the KRW-USD exchange rate could lead to continued tightening domestically."

Kim Ji-na, a researcher at Eugene Investment & Securities, said, "If volatility in the KRW-USD exchange rate increases amid the global monetary policy decoupling phase, including the widening interest rate differential with the U.S., upward pressure on inflation could also increase, although the economy is slowing, the pace is not rapid." She explained that if the KRW-USD exchange rate, which has recently hovered around 1,300 KRW, surges again, it could raise import prices and act as an upward factor for interest rates.