Despite Domestic Demand Weakness... "August Rate Cut Possibility Has Decreased" [BOK Focus]

Domestic Demand Slump Continues Despite Slowing Inflation
Concerns Over Rapid Household Debt Increase Grow Unlike Last Month
Experts Who Forecasted August Revise Predictions to October

With about two weeks remaining before the Bank of Korea's Monetary Policy Committee decides on the base interest rate, concerns over sluggish domestic demand due to accumulated high interest rates continue to be raised. However, the possibility of a rate cut in August has further diminished amid soaring housing prices centered in the Seoul metropolitan area and worries over household debt.

In a survey conducted last month by Asia Economy targeting 20 economic experts including domestic and international bank and economic research institute economists and securities firm analysts, 40% (8 people) predicted an interest rate cut in August, but many have since revised their forecasts to an October rate cut.

Experts who advocated for an August rate cut last month commonly cited the 'continued slowdown in inflation' as the reason. Inflation has slowed to around 2%, and expected inflation has eased to 3%, showing a stable trend, which was seen as creating conditions favorable for a rate cut.

Additionally, since the domestic economy is showing very sluggish performance centered on domestic demand, there were calls for an urgent rate cut as a measure to stimulate the economy. The fact that advanced countries' central banks took preemptive rate cuts last month, differentiating their monetary policies from the U.S., was also cited as a factor that could ease the Monetary Policy Committee's burden in making policy decisions.

However, recent diagnoses suggest that the possibility of an August rate cut has decreased due to the rise in housing prices centered in the Seoul metropolitan area and the household debt issue. In the minutes of the Monetary Policy Direction meeting held on July 11, the committee members evaluated positively that the inflation rate is converging to the target of 2%. However, they collectively expressed concerns about the rapid rise in housing prices centered in the Seoul metropolitan area and the resulting surge in household debt.

Moon Hong-cheol, a researcher at DB Financial Investment, said, “The Monetary Policy Committee showed a more hawkish stance than expected in July,” adding, “Since the committee members are showing concerns about the real estate market, it will not be easy to lower interest rates immediately this month.”

Kim Sang-hoon, a researcher at Hana Securities, said, “The July Monetary Policy Committee minutes show stronger concerns about household debt and the real estate market,” and added, “Although external conditions have been met with the increasing likelihood of a U.S. rate cut, the possibility of a surprise rate cut in August seems low.”

Park Sang-hyun, a researcher at iM Securities, explained, “Looking only at domestic demand, an early rate cut is necessary, but an early rate cut could potentially stimulate household debt, putting the Bank of Korea in a dilemma.”

As domestic demand remains sluggish despite strong exports, institutions are lowering their economic growth forecasts for this year. The Korea Development Institute (KDI) revised its economic growth forecast for this year down from 2.6% to 2.5% in its updated economic outlook this month, citing domestic demand as the cause. KDI forecasted, “Since the growth in domestic demand, centered on private consumption and facility investment, will fall short of previous expectations, the economic recovery will be somewhat delayed.” In the securities sector, Samsung Securities lowered its annual growth forecast from 2.7% to 2.5%, and Korea Investment & Securities, Eugene Investment & Securities, and KB Securities also revised their forecasts down from 2.5% to 2.4%.

The Bank of Korea will decide on the base interest rate at the Monetary Policy Committee meeting on the 22nd. On the same day, it will also announce the revised economic outlook for August. The Bank of Korea had forecast an annual economic growth rate of 2.5% in May, expecting 2.9% growth in the first half and 2.2% growth in the second half of the year.