Bank of Korea Signals Interest Rate Cut "Preparing for Timely Policy Shift" (Comprehensive)

Lee Chang-yong, BOK Governor, Hints at Possible Base Rate Cut
Number of Monetary Policy Committee Members Supporting Rate Cut Forward Guidance Increases to Two
Exchange Rate and Household Debt Considered Variables for Rate Cut

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee meeting held on the 11th at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

The Bank of Korea hinted at the possibility of lowering the base interest rate in the future. However, it assessed that factors such as household debt and volatility in the foreign exchange market could delay the rate cut.

Lee Chang-yong, Governor of the Bank of Korea, said at a press conference held after keeping the base rate steady at 3.50% per annum on the morning of the 11th, "In May, it was not a situation where the turn signal was on, but rather a state of deliberating whether to change lanes in preparation for a rate cut," adding, "Now, the situation has been created where we are ready to change lanes and make a directional shift at an appropriate time."

After freezing the rate on the same day, the Bank of Korea's Monetary Policy Committee stated in its public communication, "Future monetary policy will thoroughly maintain a tightening stance while closely examining the trade-offs among policy variables such as the slowing inflation rate, growth, and financial stability, and will review the timing of base rate cuts."

At the press conference, Governor Lee conveyed, "Two members of the Monetary Policy Committee expressed opinions that the possibility of a base rate cut within the next three months should be kept open." In May, only one member expressed the view of a rate cut within three months in the forward guidance, but this month the number increased to two.

Governor Lee explained, "The two members believe that since the inflation rate has decreased, the atmosphere to discuss the possibility of a rate cut has been created." On the other hand, "Four members think that although there has been significant progress in stabilizing inflation, it is necessary to further examine and confirm the impact of rate cut expectations on financial stability through the foreign exchange market, housing prices, and household debt."

Regarding the recent trend of consumer price inflation falling to the mid-2% range, Governor Lee evaluated it as "a positive change and a result consistent with expectations." This is interpreted to mean that the situation has been set for discussing a base rate cut as inflation has declined as anticipated.

However, he emphasized, "There are many risk factors coming from ahead, such as the foreign exchange market, real estate in the Seoul metropolitan area, and household debt," adding, "A directional shift may take considerable time."

He particularly expressed concerns about real estate in the Seoul metropolitan area. Governor Lee said, "The issue of rising real estate prices in the Seoul metropolitan area has become more serious than in May," and expressed concern that "the rise in real estate prices could exacerbate the household debt problem."

He also stated, "All Monetary Policy Committee members agreed that the Bank of Korea should avoid mistakes such as excessively supplying liquidity or sending wrong signals about the timing of rate cuts that could trigger housing price increases."

Furthermore, he mentioned that the market is reflecting the possibility of a base rate cut too prematurely. He said, "The current market expectations for a rate cut are somewhat excessive," and added, "It is undesirable that expectations of a rate cut have been priced in early and have caused housing prices to rise."