[Geumtongwi poll] ② The Biggest Variable in BOK's Interest Rate Decision is 'US Monetary Policy'

30th Bank of Korea Monetary Policy Committee Expected to Keep Base Rate Steady
Key Future Variable Is Timing of US Rate Cut
US Inflation and Economic Uncertainty Make Predictions Difficult
International Oil Price Decline Could Lead to Rate Cut
Household Debt and Fiscal Spending Expansion Support High Interest Rates

As the Monetary Policy Committee of the Bank of Korea is expected to keep the base interest rate unchanged at the current 3.5% for the time being, experts see the direction of U.S. monetary policy as the biggest variable in the Bank of Korea's rate decisions going forward. It is explained that the timing of Korea's rate cuts will be determined by when the U.S., which has effectively halted its rate hike streak, begins to lower rates. In addition, international oil prices, inflation, domestic household debt, and elections were cited as factors making it difficult to gauge the direction of monetary policy.

Key Variable for Base Rate... 'International Oil Prices → U.S. Monetary Policy'

According to a survey conducted by Asia Economy on the 27th targeting 21 domestic and international securities analysts and economists from economic research institutes, the majority of experts mentioned U.S. monetary policy (11 respondents) as the key variable (multiple answers allowed) for the Bank of Korea's future monetary policy. This was followed by consumer prices (9), international oil prices (8), and household debt (6). Some experts also pointed to the U.S. presidential election, real estate market, economic growth rate, and general elections.

In a survey conducted before the Monetary Policy Committee meeting in October, international oil prices were the most cited with 9 respondents, followed by U.S. monetary policy with 7. At that time, the outbreak of the Israel-Hamas war caused international oil prices to surge to the $90 per barrel range, increasing oil price risks. However, recently, as oil prices have fallen back to the $70?80 per barrel range, more experts have mentioned the U.S. situation rather than oil prices.

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee's plenary meeting held on the 19th at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

Focus on U.S. Rate Timing... Impact on Korean Monetary Policy

Experts predict that the timing of the Bank of Korea's base rate cuts will be determined by when the U.S. Federal Reserve (Fed) lowers rates next year. Since the Federal Open Market Committee (FOMC) meeting in July, the Fed has paused rate hikes, effectively halting its rate increase streak, and the timing of when it will begin cutting rates is a key focus for central banks and markets worldwide.

The market currently views the second to third quarters of next year as the most likely period. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the market currently assigns a 43% probability that the Fed will cut rates by 0.25 percentage points at the June FOMC meeting next year. Considering that Korea's monetary policy is not truly independent of the U.S., it is expected that the Bank of Korea will consider rate cuts around this time. SG Securities economist Oh Seok-tae said, "Whether and when the U.S. cuts rates is the most important factor determining whether and when the Bank of Korea will cut rates next year."

Park Sang-hyun, a researcher at Hi Investment & Securities, also said, "Considering the policy rate inversion gap between Korea and the U.S. (2 percentage points), the timing of the Fed's rate cuts is important." The market expects U.S. rate cuts next year because inflationary pressures are easing and concerns about economic slowdown are emerging. The U.S. consumer price inflation rate in October was 3.2% year-on-year, down from 3.7% in September, and retail sales, which support the economy, also fell by 0.1% compared to the previous month.

However, many also point out that it is too early to expect Fed rate cuts next year. Fed Chair Jerome Powell said at an International Monetary Fund (IMF) conference earlier this month, "Although U.S. inflation has declined, it still remains well above the 2% target," and "If it is appropriate to make monetary policy more restrictive, we will not hesitate to do so." Considering this stance, there is also a possibility that Powell will show a hawkish (monetary tightening preference) stance again at the next FOMC meeting, potentially changing market sentiment.

Possibility of Korea Cutting Rates Before the U.S.

While the timing of U.S. rate cuts is important, there is also interest in whether the Bank of Korea might cut rates before the U.S. Anyeha Ahn, a researcher at Kiwoom Securities, predicted, "If the U.S. cuts rates, Korea's monetary policy capacity will be secured, allowing for rate cuts due to domestic demand weakness." Jo Young-moo, a research fellow at LG Economic Research Institute, explained, "It will be difficult for Korea to cut rates before the U.S."

On the other hand, some opinions suggest that if the expectation of U.S. rate cuts next year becomes clear, the Bank of Korea could take the lead in cutting rates first, considering domestic economic recovery or financial stability. Agustin Carstens, General Manager of the Bank for International Settlements (BIS), said at a Bank of Korea press briefing on the 24th, "The Bank of Korea is an institution guaranteed autonomy," and "It has sufficient capacity to operate monetary policy independently of the U.S. situation."

Still Unstable Middle East... Close Watch on International Oil Price Trends

Although international oil prices have recently fallen to the $70?80 per barrel range, they remain a key factor influencing global inflation rates and a core variable in monetary policy. Yoon Seok-jin, a researcher at Hana Financial Management Research Institute, said, "Consumer prices in October exceeded expectations and showed a rebound, and at the last Monetary Policy Committee meeting, Governor Lee Chang-yong expressed concerns about delays in achieving inflation targets due to Middle East risks," adding, "It is judged that vigilance against high inflation remains strong."

For now, many believe that oil prices are unlikely to surge significantly. Since the global economy is weak, the possibility of increased crude oil demand is low, and U.S. crude oil inventories have already increased substantially, making it difficult for oil-producing countries to continue production cuts. The Organization of the Petroleum Exporting Countries (OPEC) and the OPEC Plus group, which includes major non-OPEC oil-producing countries, have not agreed on production adjustments to defend prices.

A decline in international oil prices can reduce inflationary pressure and act as a factor for lowering the base interest rate. However, on the other hand, excessive household debt growth and government fiscal spending are expected to be factors for maintaining high interest rates. In particular, the household debt-to-GDP ratio exceeding 100% is an element that makes it difficult for the Bank of Korea, which manages the macroeconomy, to cut rates. Lowering rates and increasing household debt such as mortgage loans could negatively affect not only financial stability but also consumption and growth rates.

Additionally, next year's U.S. presidential election and Korea's general election are also major variables. Governments increasing fiscal spending ahead of elections can stimulate inflation rates. Yoon Yeo-sam, a researcher at Meritz Securities, pointed out that the possibility of expansionary fiscal policy before the U.S. election is important for future monetary policy, saying, "Considering that fiscal contributions were significant to the upward revision of U.S. growth rates and U.S. Treasury issuance this year, agreements on fiscal policy after the temporary budget ends in January next year will be important."

U.S. President Joe Biden is delivering a speech to supporters and members of Congress at the Inflation Reduction Act (IRA) 1st anniversary event held on August 16 (local time) in the East Room of the White House in Washington, D.C. Photo by Yonhap News.