Mepa Remarks by Bank of Korea Governor... Fading Expectations for Interest Rate Cuts in the First Half

Lee Chang-yong, Governor of the Bank of Korea, "Rate Cut Unlikely Within 6 Months"
Premature Rate Cuts Raise Concerns Over Real Estate Market Stimulation Rather Than Economic Boost

Lee Chang-yong, Governor of the Bank of Korea, is speaking at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul on the 11th. (Photo by Bank of Korea)

Lee Chang-yong, Governor of the Bank of Korea, mentioned that the base interest rate will be maintained at the current level for at least the next six months, dampening market expectations for a rate cut in the first half of the year. His remarks were interpreted as more hawkish than the market anticipated, leading experts to push back their forecasts for when the Bank of Korea might lower the base rate.

At a press conference held after the Bank of Korea's Monetary Policy Committee (MPC) decided to keep the base rate at 3.5% annually on the morning of the 11th, Governor Lee said, "Personally, I think it will be difficult to cut the base rate for the next six months." He added, on the premise that this reflected the views of MPC members, "Most opinions are that discussing a rate cut at this point is premature."

The market had expected that the Bank of Korea might lower the base rate as early as the second quarter, citing factors such as the slowing inflation rate and the possibility of a rate cut in the United States. However, Governor Lee’s somewhat hawkish view that there would be no rate cut within six months prompted an immediate market reaction, including a rise in government bond yields during the previous trading session.

Governor Lee’s move to curb early market expectations for a rate cut is interpreted as considering that global inflation has not yet been fully controlled, along with still-high levels of household debt and real estate prices. Notably, South Korea’s consumer price index in December last year was 3.2%, significantly above the Bank of Korea’s target of 2%. The U.S. consumer price index for December, released the previous day, also exceeded expectations at 3.4%, compared to the forecasted 3.2%, reducing early rate cut expectations in the U.S. as well.

He also raised concerns that a rapid rate cut could stimulate real estate prices. Governor Lee stated, "The real estate market is currently in an adjustment phase, and we must ensure that a premature rate cut does not lead to a rise in real estate prices."

Governor Lee’s statement about maintaining rates for six months was widely regarded as an unusual remark that exceeded market expectations. Jinah Kim, a researcher at Eugene Investment & Securities, explained, "Governor Lee expressed concerns that a premature rate cut could stimulate the real estate market rather than effectively boost the economy," adding, "He effectively blocked specific market expectations for a rate cut."

Although he prefaced his remarks as personal opinions, considering the governor’s influence on the MPC, the dominant expectation is that the Bank of Korea will keep the base rate unchanged for more than six months. Dong-rak Gong, a researcher at Daishin Securities, said, "Governor Lee unusually provided forward guidance by specifying a six-month period to the financial market," and added, "Accordingly, the previous view that Korea could start cutting rates as early as the second quarter this year has been revised to a start in the third quarter." Jiman Kim, a researcher at Samsung Securities, emphasized, "There were many remarks from the governor at the press conference that blocked expectations for an early rate cut," and noted, "Our base forecast for Korea’s base rate is three cuts starting in May this year, but given the governor’s remarks, the timing of the rate cut may be delayed."