[Geumtongwi poll]② "Inflation must be controlled and US pivoted for interest rates to fall"

Korea's FOMC Expected to Hold Rates Steady for 10th Consecutive Time
US Rate Cut Timing Continues to Be Delayed
International Oil Prices Rebound, Adding Variables to Controllable Inflation

As the Bank of Korea's Monetary Policy Committee is expected to keep the base interest rate unchanged for the 10th consecutive time at this month's meeting, experts agree that the biggest variables influencing future rate decisions will be inflation and the timing of the U.S. monetary policy shift. Although a rate cut in the U.S. in the second half of the year is almost certain, the pivot point continues to be delayed due to strong various indicators, keeping market attention focused.

According to a survey conducted by Asia Economy on the 8th targeting 20 experts including economists from economic research institutes and analysts from domestic and foreign securities firms, the majority of experts (11 respondents, including multiple answers) said consumer prices will be the biggest variable for South Korea's monetary policy going forward. The timing of the U.S. rate cut (10 respondents) came next.

In a survey conducted before the Monetary Policy Committee meeting in February, 8 experts said the timing of the U.S. base rate cut was the biggest variable, but this time 10 experts gave the same answer, an increase of 2. After last month's Federal Open Market Committee press conference, Jerome Powell, Chair of the U.S. Federal Reserve Board, hinted at the possibility of a rate cut within the year, but due to a hot labor market and rising oil prices, the timing has been continuously postponed, which is interpreted as the reason for the increase in experts mentioning the U.S. situation.

Retreating 'South Korea July Rate Cut Speculation'

Until recently, the market expected the first domestic rate cut to occur in July. The outlook was that if the U.S. cuts rates in May, South Korea would follow with a rate cut afterward. However, expectations for a 'May rate cut' have been gradually diminishing due to strong U.S. employment data and hawkish remarks from Federal Reserve officials. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of the Fed cutting rates by 25 basis points (1bp = 0.01 percentage point) in June has sharply dropped to 50.8%. Kim Seongsu, a researcher at Hanwha Investment & Securities, explained, "If the timing of the U.S. rate cut is delayed, South Korea should keep open the possibility of a rate cut in August rather than July."

Although South Korea raised rates ahead of the U.S., the market consensus is that it will not be easy to be the first to cut rates. Jo Yonggu, a research fellow at Shin Young Securities, added, "To narrow the interest rate gap between Korea and the U.S., the Bank of Korea will only join in a cautious rate cut after the Fed cuts rates." Kim Jina, a researcher at Eugene Investment & Securities, explained, "Domestic demand is relatively sluggish and inflation is stabilizing, but it is not a situation where we must cut rates immediately ignoring the U.S.," adding, "It is highly likely that Korea will move in tandem or lag behind the U.S. after appropriately confirming domestic and external conditions."

Other experts also cited construction industry conditions and economic conditions, with three respondents each. Gong Dongrak, a researcher at Daishin Securities, said, "After overcoming inflationary pressures and starting rate cuts, economic conditions will become the key factor in monetary policy decisions." Kim Jina, who named consumer prices and the real estate market as the biggest variables, explained, "Policy is heavily focused on medium- to long-term structural risks linked to real estate project financing (PF), which directly affects domestic household consumption," adding, "It will be a factor influencing overall growth and monetary policy including domestic demand."

International oil prices, which have been rising sharply since mid-last month, are also a concern. Due to worsening Middle East tensions and the decision by OPEC Plus (OPEC+), a coalition of major non-OPEC oil-producing countries, to maintain oil production cuts, oil supply instability has increased, pushing prices above $90 per barrel. Ahn Jaekyun, a researcher at Shinhan Investment Corp., said, "If international oil prices continue to rise, the timing for inflation to reach the target (2%) is expected to be delayed," adding, "Concerns about a sharp rise in oil prices need to be limited to gain confidence in the path toward the inflation target." Although inflation is steadily declining, oil price direction can act as a variable.

While the market's focus is on 'when the rate cut will happen,' 'how quickly it will happen' is also an important factor. Even if the Bank of Korea makes its first rate cut in the second half of the year, the pace afterward will vary depending on domestic conditions, and the biggest indicator determining this is currently inflation. Ahn Yeha, a researcher at Kiwoom Securities, said, "If the inflation slowdown trend is not confirmed, the magnitude of the Bank of Korea's rate cut could also change."