The US Plans Only One Interest Rate Cut This Year, South Korea Likely to Follow Once as Well

Fed's Rate Cut Forecast This Year Revised from 3 Times to Once
If US Lowers Benchmark Rate Around September, Bank of Korea Expected to Cut Rates in October and November

Jerome Powell, Chair of the U.S. Federal Reserve (Fed)
[Photo by Yonhap News]

The U.S. Federal Reserve (Fed) has revised its forecast for interest rate cuts this year from three times to just once, strengthening the view that the Bank of Korea (BOK) will also cut its benchmark interest rate only once within the year. Lee Chang-yong, Governor of the BOK, also expressed at the foundation anniversary ceremony the day before that although the fight against inflation has entered its final phase, premature interest rate cuts should be avoided.

On the 12th (local time), the Fed held its Federal Open Market Committee (FOMC) regular meeting and kept the benchmark interest rate steady at 5.25-5.50% per annum. The newly released dot plot (a chart showing future interest rate projections) indicated a median year-end rate forecast of 5.10%, up 0.5 percentage points from the 4.6% predicted three months ago. This means the forecast for rate cuts this year has been lowered from three times to once.

Accordingly, the market expects the Fed to cut the benchmark interest rate once around September or November. The probability of a rate cut in September reflected in the Fed Funds Futures rose from 58.3% to 64.5%, while the probability for November increased from 88.6% to 102.5%.

BOK Expected to Cut Interest Rate in Q4

As the expected timing for the U.S. rate cut is pushed back, it is anticipated that the BOK will also only be able to cut its benchmark interest rate as early as the fourth quarter. The BOK has repeatedly stated that it is difficult to lower the benchmark rate until there is confidence in price stability.

Governor Lee said in his speech commemorating the 74th anniversary the day before, "If a premature interest rate cut stimulates prices and forces us to raise rates again, the policy cost to be borne then will be much greater," adding, "Until there is confidence that inflation will converge to the target level, it is necessary to patiently maintain the current monetary tightening stance sufficiently."

He emphasized, "Now that we have entered the final phase of the fight against inflation, delicate and balanced judgment is required," and added, "It is time to recall the principle of Roman Emperor Augustus, 'Festina Lente' (Make haste slowly)."

Lee Chang-yong, Governor of the Bank of Korea, is delivering a commemorative speech for the 74th anniversary of the Bank of Korea's founding on the morning of the 12th at the Bank of Korea in Jung-gu, Seoul. (Photo by Bank of Korea)

The market also strongly expects the BOK to keep the benchmark interest rate steady through July and August. The dominant view is that the BOK will cut the benchmark rate once in October or November during the fourth quarter. Until April, many predicted a rate cut in the third quarter, but with the delay in the U.S. rate cut, the forecast timing has shifted to the fourth quarter.

Joo-won Joo, Head of Economic Research at Hyundai Research Institute, said, "If the U.S. cuts its benchmark interest rate once in September this year, the BOK is expected to cut its rate in October or November," adding, "Given the current situation where U.S. monetary policy is crucial, it is unlikely that the BOK will cut rates ahead of the U.S."

Seong-su Kim, a researcher at Hanwha Investment & Securities, also explained, "Under current conditions, it is difficult for the BOK to cut rates before the U.S.," and said, "The U.S. will cut rates first, and the BOK is expected to follow with a rate cut around October."

Jaekyun Ahn, a researcher at Shinhan Investment Corp., said, "The BOK will basically move after confirming the Fed's monetary policy direction change," and forecasted, "A U.S. rate cut in September and a BOK rate cut in October."

Government: "Uncertainty in U.S. Monetary Policy Persists, Market Volatility Should Be Monitored"

Meanwhile, on the morning of the same day, Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, held a macroeconomic and financial meeting with Governor Lee, Financial Services Commission Chairman Kim Ju-hyun, and Financial Supervisory Service Governor Lee Bok-hyun, stating, "Uncertainty regarding the timing and magnitude of the U.S. rate cut persists," and added, "With differentiated monetary policies among major countries such as rate cuts by the European and Canadian central banks, the possibility of increased volatility in global financial markets cannot be ruled out."

Park Jong-woo, Deputy Governor of the BOK, emphasized, "Chairman Powell expressed a cautious stance that additional confidence in disinflation is needed for rate cuts and that the pace may be slower than expected," adding, "Depending on future movements of key indicators such as inflation and employment, market volatility may expand frequently, so caution is required."