[Ask IB]② JP Morgan "Korea's Interest Rate Cuts to Start in Q2 Next Year Ahead of the US"

Park Seok-gil, JP Morgan Economist
"Interest Rate Cut Before the US Next Year" Minority Opinion Draws Attention
Disagrees with Persistent High Inflation
Lower Growth Forecasts for This Year and Next
Expected Recovery from This Year's Low Point

Seokgil Park, JP Morgan Economist. Photo by Hyunmin Kim kimhyun81@

"The base interest rate cut in Korea is expected to occur earlier than in the United States, likely in the second quarter of next year."

On the 12th, at the Korea JP Morgan office located on Seosomun-ro, Jung-gu, Seoul, economist Park Seok-gil predicted that Korea's interest rate cut would take place in the second quarter of next year, ahead of the U.S. Despite widespread expectations that Korea's rate cut timing would be delayed due to the U.S.'s prolonged high interest rates, he expressed the view that Korea would lower its base rate in the second quarter of next year.

Park's forecast stands out because the current interest rate gap between Korea and the U.S. has widened to 2 percentage points, the largest ever. There is a dominant concern that if Korea cuts rates before the U.S., the Korea-U.S. interest rate gap will widen further, intensifying volatility in financial and foreign exchange markets. Against this backdrop, Park presented a minority opinion. In a recent survey conducted by Asia Economy on 22 market and economic experts ahead of the Monetary Policy Committee meeting on the 19th, most experts expected the U.S. to cut rates first and Korea to follow around the same time. However, Park expressed the view that Korea could initiate a monetary policy shift before the U.S.

Park's opinion is noteworthy because of his track record of accurate forecasts. In 2021, before the Bank of Korea (BOK) implemented monetary tightening, the financial market largely expected the BOK to maintain accommodative monetary policy due to the impact of COVID-19. At that time, Park was among the minority who predicted Korea would raise rates before the U.S., and the BOK indeed raised rates ahead of the U.S. in August that year, validating his forecast. Last year, his inflation forecasts, which were higher than the market consensus, also proved accurate, earning him the nickname "the soothsayer."

His exceptional intuition is attributed not only to his special connection with the BOK but also to his passion for meticulously reading and analyzing the minutes reflecting the opinions of the Monetary Policy Committee members. Park joined the BOK in 2002 and was once a BOK official. Three years later, he went to the U.S. to study at Indiana University, earning master's and doctoral degrees in economics. After working at the International Monetary Fund (IMF), he joined JP Morgan in 2015 and currently serves as the chief economist responsible for Korea.

Although the domestic market atmosphere has rapidly changed due to expectations of prolonged high interest rates in the U.S., Park disagreed with the notion that high inflation will become entrenched. While concerns are growing that high interest rates will persist longer than expected, he forecasts that inflation in Korea is gradually slowing and will converge toward the BOK's target inflation rate (2%) in the second half of next year.

Below is a Q&A with economist Park.

Seokgil Park, JP Morgan Economist. Photo by Hyunmin Kim kimhyun81@

-Recently, the atmosphere has rapidly changed, and there are forecasts that the U.S.'s high interest rates will last longer than expected. Should we consider high interest rates as the new normal? Is high inflation becoming entrenched?

▲If the forecasts that the output (GDP) gap and inflation gap will converge to neutral levels are correct, the monetary policy stance will also move toward a neutral level. Although the exact neutral level is unknown, it will likely be lower than the current base rate but higher than the pre-COVID-19 level. Regarding inflation forecasts, I expect inflation to converge to the BOK's target level (2%) in the second half of next year. If so, it might be an overstatement to describe this as entrenched high inflation.

-Since the 1980s, we have experienced a high inflation shock for the first time in 40 years, and market vigilance remains. Should we consider that the era of structural low inflation has ended and that a high inflation era similar to before 2000 has returned?

▲Compared to the pre-COVID-19 period, inflation expectations have risen over the past three years, and the fragmentation of supply chains has also contributed. There is certainly a trend of higher inflation rates than before, but quantifying the extent is difficult. Before COVID-19, like in Korea, central banks were concerned about inflation rates falling below targets. Now, inflation targets have become more achievable.

-Looking at the labor market, the U.S. remains hot, and Korea's employment rate is at an all-time high. Is the impact of COVID-19 still ongoing?

▲Considering shocks affecting the labor market over the past few years, phenomena such as early retirement after the pandemic, the rise of flexible but precarious labor forms like platform work, and the delayed effects of large-scale fiscal and monetary easing policies at the pandemic's start may overlap.

-With the end of globalization and ongoing supply chain separation and restructuring, do you think the U.S. and Europe-led supply chain separation can succeed?

▲It depends on how success is defined. Due to recent experiences, geopolitical risk has become a more significant factor in supply chain decisions than before, so supply chain restructuring will likely continue in that direction. However, if success means a substantial separation of supply chains between different blocs, it would be difficult to achieve given the complex interconnected nature of global supply chains. I do not believe such a degree of separation is currently the goal.

-With the U.S. strongly intent on controlling advanced technologies like semiconductors, can China's economy sustain long-term growth?

▲Though slightly different from the technological aspect, for per capita GDP to surpass emerging market levels (excluding city-states, resource-rich countries, and tax havens), governance structure advancement seems necessary. The private sector's trust in long-term policy outlooks will be crucial.

-Korea's economic growth rate is expected to remain in the low 2% range next year, following about 1% this year. Should we accept low growth as the norm?

▲Although this year's and next year's growth rates may be somewhat disappointing, the five-year average from 2020 slightly underperforms potential growth. This is a cost inevitably paid to restore macroeconomic balance. While long-term forecasts are cautious, I expect a recovery trend to continue from this year's low point.

-The BOK is also deeply considering the timing of the base rate cut. Excessive expectations for rate cuts earlier this year have recently subsided. Could Korea cut rates before the U.S.?

▲The main reason for expecting an earlier rate cut is the anticipation of a rapid domestic economic cooling, which has not materialized. Rate cuts will be decided based on domestic economic conditions, especially the inflation stabilization path, so it should not be mechanically linked to the U.S. rate cut timing. However, since global inflation trends are somewhat synchronized and similar macroeconomic adjustments are underway, Korea's rate cut could occur around the same time or slightly earlier than the U.S. In the U.S., fixed-rate loans dominate, but Korea has a high proportion of variable-rate loans sensitive to interest rate changes, giving households more reasons to adjust behavior. Although concerns exist about widening Korea-U.S. interest rate gaps if Korea cuts rates first, if signals of an imminent U.S. rate cut emerge, the market will likely price it in early, so it should not pose a significant problem.

Seokgil Park, JP Morgan Economist. Photo by Hyunmin Kim kimhyun81@

-Regarding inflation, Korea's outlook is not far off from the BOK's forecast, but core inflation is not falling easily. With recent volatility in oil prices due to the Israel-Palestine conflict, is there a risk of inflation rising again?

▲Headline inflation is influenced by unpredictable external factors like oil prices, so uncertainty exists. However, the more stable core inflation appears to be gradually converging toward the 2% level on a monthly basis. This should be confirmed in year-on-year inflation rates in a few months. Unless there is a significant shock from external conditions like oil prices, I expect inflation to approach the 2% target by the end of the third quarter next year.

-The IMF recently lowered Korea's growth forecast for next year to 2.2%. How do you see Korea's growth next year?

▲I forecast growth at 1.8% next year. As mentioned earlier, growth below potential during this and next year is a cost paid to restore macroeconomic balance. Also, the global growth environment next year may weaken compared to this year. Korea's domestic demand and net exports have a complementary relationship, so growth trends in the mid-2020s, as the pandemic shock fades, will likely be stable and similar to the 2010s. However, caution is needed regarding a long-term downward stabilization of growth rates.

-You are known for carefully reading the Monetary Policy Committee minutes. With recent committee member changes, have you sensed any shifts in internal sentiment?

▲With unanimous decisions and three member changes this year, it was difficult to identify individual views from anonymous minutes. However, the new members appear to cautiously maintain a hawkish stance consistent with positions expressed since early this year.

-Recently, the foreign exchange rate surged, and government bond yields soared, causing volatility in financial and foreign exchange markets. How long will this heightened market volatility continue?

▲In fact, anything can happen between the interview and the article's publication. If monetary policy outlooks of major countries are among the factors expanding financial market volatility, it will take considerable time before the stance is fully and directionally shifted. During this period, unpredictable variables may arise in any direction, so this is a reasonable judgment.