[금통위poll]② "The Key Variable in Monetary Policy Is the Slowdown of the Chinese Economy"... Respondents Increased from 0 to 7 in One Month

Slowing Growth in Central Region and Rapid Increase in Household Debt... Bank of Korea's Concerns Rise
Considering Weak Growth, Rate Cut Should Be Considered
However, Rising Oil Prices and Debt Increase Are Factors for Rate Hike

Amid growing fears of an economic downturn in China, the instability of international oil prices and household debt has triggered a red light for the Bank of Korea's monetary policy decisions. As the economic slowdown in China makes it difficult to recover growth in the second half of the year, there are increasing calls to consider lowering the base interest rate. However, considering the soaring household debt and international oil prices, some argue that interest rates should rather be raised. For the Bank of Korea, it is expected to be a situation where it can neither lower nor raise rates for the time being.

According to a survey conducted by Asia Economy on the 21st targeting 21 domestic and international securities analysts and economic research institute researchers, a significant number of experts cited inflation including international oil prices, the economic slowdown in China, and the increase in household debt as the key variables (multiple answers allowed) for the Bank of Korea's future monetary policy. Inflation, the Bank of Korea's top priority, was chosen by 11 respondents, closely followed by household debt (8) and the slowdown in China's growth rate (7).

Fear of China's Economic Slowdown... Factor for Base Rate Cut

First, both inside and outside the Bank of Korea and the market, the recent economic slowdown in China has emerged as a key variable in monetary policy. In a survey conducted ahead of last month's Bank of Korea Monetary Policy Committee meeting, no experts selected 'China's economy' for the same question, but this time 7 did. This indicates that concerns about China's economic slowdown have grown significantly within a month.

In fact, China, South Korea's largest trading partner, is facing deflation concerns as consumer prices fell by 0.3% last month despite reopening (resumption of economic activities) and various economic stimulus measures. Additionally, the possibility of default by Country Garden (Biguiyuan), the top real estate company in China, is increasing, and another real estate developer, Evergrande (Hengda), has filed for bankruptcy protection in the U.S., intensifying downward pressure on China's economy.

If China's economy falters, South Korea's exports will take a direct hit. Although some degree of 'de-Chinaization' has progressed due to U.S.-China hegemonic conflicts, South Korea's economic dependence on China remains very high. As negative factors from China continue, the 'low in the first half, high in the second half' outlook that predicted a full-scale economic recovery in the second half is losing strength. Some voices express concern that even the Bank of Korea's forecasted economic growth rate of 1.4% for this year may be difficult to achieve.

The unexpectedly sluggish Chinese economy could act as a factor for lowering the base interest rate. Hur Jung-in, a researcher at Daol Investment & Securities, pointed out, "China's economic slowdown is unlikely to trigger a global systemic risk," but added, "If the slowdown in China's economy expands, it could negatively affect domestic exports." Gina Kim, a researcher at Eugene Investment & Securities, also said, "Since the recovery of China's and IT sectors' economies is more sluggish than expected, growth momentum in the second half may weaken."

Rising International Oil Prices... Inflation and Exchange Rate Uncertainty

However, still unstable inflation is a factor for the Bank of Korea to maintain high interest rates. Although petroleum prices, which rose sharply last year, began to stabilize this year, the year-on-year consumer price inflation rate has been slowing down in April (3.7%), May (3.3%), June (2.7%), and July (2.3%), but recently international oil prices have surged again, creating significant inflation uncertainty.

Brent crude oil from the North Sea, which was in the low $70s per barrel at the beginning of last month, is currently around $84, West Texas Intermediate (WTI) is in the $82 range, and Dubai crude is around $86, all having risen significantly. With the rebound in international oil prices, import prices rose by 0.4% last month compared to the previous month, marking an increase after three months of decline. When import prices rise, they are reflected in producer prices and then consumer prices with a time lag.

The Bank of Korea also forecasts that the consumer price inflation rate, which fell to 2.3% last month, will gradually rise from this month and reach around 3% by the end of the year. The inflation rate is still too high to consider lowering interest rates. In particular, the rise in international oil prices affects U.S. inflation and can support the Federal Reserve's prolonged tightening. If U.S. tightening continues, the Bank of Korea will find it more difficult to lower rates due to the won-dollar exchange rate rise and the interest rate differential between Korea and the U.S.

Kim Sun-tae, a researcher at KB Kookmin Bank, said, "If the won-dollar exchange rate surpasses the 1,350 won level and maintains a steady upward trend, an interest rate hike may be inevitable." Moon Hong-chul, a researcher at DB Financial Investment, explained, "The direction of international oil prices is expected to influence U.S. monetary policy. Since the volatility of the won-dollar exchange rate has increased recently, the Monetary Policy Committee's interpretation related to this is important."

View of Yeouido apartments from the 63 Building observatory. Photo by Hyunmin Kim kimhyun81@

Household Debt, a Concern for the Bank of Korea... Difficult to Lower Rates

Recently, household debt has increased significantly due to the recovery of the real estate market, which also makes it difficult for the Bank of Korea to lower interest rates. Last month, household loans from banks increased by 6 trillion won in one month, marking four consecutive months of growth. Despite high interest rates, real estate transactions have revived mainly in Seoul and the metropolitan area, causing a sharp increase in mortgage loans. The increase in mortgage loans over the past four months is close to 20 trillion won.

Concerns about household debt within the Bank of Korea are significant, making it difficult to shift to an accommodative monetary policy prematurely. Kim Sung-soo, a researcher at Hanwha Investment & Securities, said, "The consensus among all Monetary Policy Committee members is that the household debt issue should be addressed by maintaining or further tightening monetary policy rather than easing." Lowering interest rates could increase expectations of rising housing prices, leading to a surge in mortgage loans and household debt, so it will be difficult to consider rate cuts for the time being.

The Bank of Korea is expected to maintain its base rate freeze stance while closely monitoring the economic slowdown in China, the increase in household debt, and the won-dollar exchange rate trend. Park Seok-gil, an economist at JP Morgan, said, "The inflation stabilization effect of monetary policy is expected to become more visible, so the factors for additional rate hikes are not strong at present," but added, "At the same time, considering the household debt issue, it is premature to change the policy stance to easing in the near future."