Is the Possibility of an Interest Rate Cut This Month Increasing... Market Reflects It in Advance (Comprehensive)

Shin Sung-hwan, a member of the Monetary Policy Committee of the Bank of Korea, is speaking at a press briefing. Photo by Bank of Korea

As the Bank of Korea's base rate decision approaches next week, market expectations for a rate cut are growing. Recently, several key Bank of Korea officials have expressed dovish (rate cut-preferred) views, leading market interest rates to preemptively reflect this.

According to the Seoul bond market on the 2nd, the 3-year government bond yield closed at 2.811% on the 30th. The 3-year government bond yield, a representative market interest rate, even fell below the year's lowest level of 2.806% during trading on the 30th. Currently, the Bank of Korea's base rate is around 3.5%, but the market interest rates are already pricing in two or three rate cuts.

The 3-year government bond yield was close to 3% until early last month but continued to decline toward the end of September. The average 3-year government bond yield in September was 2.861%, the lowest of the year.

In particular, after Shin Sung-hwan, a member of the Bank of Korea's Monetary Policy Committee, held a press briefing on the 25th of last month, expectations for a rate cut in October increased significantly, and the market clearly reflected this.

At the briefing, Commissioner Shin defined himself as dovish and said, "Our economy does not have the luxury to wait until the housing price rise clearly slows down." This is interpreted as meaning that although the base rate was held steady in July due to concerns about financial instability from excessive housing price increases, he may advocate for a rate cut in October to address sluggish domestic demand.

The next day, on the 26th, Jang Yong-sung, another Monetary Policy Committee member, emphasized the importance of policy rate cuts and government macroprudential policy coordination by citing overseas cases such as Canada and New Zealand in a financial stability report. He suggested that financial imbalances caused by rate cuts could be addressed through proactive government policies like housing supply and household debt management, hinting at the possibility of future base rate cuts.

With two of the seven Monetary Policy Committee members publicly making dovish remarks, market interest rates immediately reflected this. Yoo Sang-young, a researcher at Korea Investment & Securities, said, "After Commissioner Shin Sung-hwan's briefing, the possibility of a rate cut in October was preemptively priced in, causing government bond yields to fall. Commissioner Shin had prioritized caution about housing price momentum as recently as the 5th of last month, but this briefing showed a shift in sentiment within the Bank of Korea."

However, contrary to market expectations, the base rate cut may be postponed from October to November. This is because the household debt issue, which has been a stumbling block for rate cuts, is not clearly resolved even in September.

According to the banking sector, the amount of new housing mortgage loans for home purchases at major commercial banks has not significantly decreased. The total amount of new individual housing mortgage loans for home purchases at the five major banks up to the 26th of last month was 7.8466 trillion won. Excluding the three days of the Chuseok holiday, the daily average as of the 23rd was 341.2 billion won, a decrease of only 5% compared to the previous month.

Lim Jae-gyun, a researcher at KB Securities, stated, "Household debt has increased over the past five months, and even if household loans decreased in September, it is necessary to verify with more than one month's data whether the slowdown is a trend. Therefore, after a minority opinion in October, I expect a rate cut in November."