[AldonSseulJob] Two Consecutive Interest Rate Cuts in 15 Years... Darkening Shadows of Recession

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The Bank of Korea has cut its base interest rate twice in a row for the first time in 15 years.

Attention is focused on the background behind this move.

The last time the Bank of Korea cut the base rate twice consecutively was during the period overlapping the 2008 global financial crisis

and the 2001 9/11 attacks and dot-com bubble.

The fact that it has cut rates twice in a row this time as well indicates that

the current economic situation is as serious as in those past cases.

Let's take a look at the factors behind the Bank of Korea's rate cuts.

Bank of Korea Cuts Base Rate Twice in a Row...First Time in 15 Years

The Bank of Korea surprised the market by lowering interest rates.

On the 28th of last month, the Monetary Policy Committee (MPC) held its final monetary policy meeting of the year and cut the base rate from 3.25% to 3.00%, a 0.25 percentage point reduction.

This followed a 0.25 percentage point cut in October, marking a pivot (monetary policy shift) after 3 years and 2 months, continuing a two-month consecutive rate cut trend.

The Bank of Korea's consecutive base rate cuts are the first since the global financial crisis (from October 2008 to February 2009), 15 years ago.

Going further back, in July-August 2001, when the dot-com bubble and the US 9/11 attacks overlapped,

the Bank of Korea also cut the base rate twice consecutively.

What is the background behind the Bank of Korea's two consecutive rate cuts?

Earlier, we briefly mentioned past cases when the Bank of Korea cut rates consecutively.

Both the dot-com bubble and the global financial crisis were major events not only in Korea's economic history but also globally.

That the Bank of Korea cut rates twice in a row is evidence that it views the current situation as serious.

This time, the rate cuts come amid domestic demand sluggishness combined with export slowdown,

indicating that the Korean economy is in an emergency situation.

The government's difficulty in injecting fiscal stimulus due to tax revenue shortfalls

is also cited as one of the reasons behind the Bank of Korea's rate cuts.

Major investment banks (IBs) have lowered their growth forecasts for the Korean economy next year from the early 2% range to between 1.7% and 1.9%.

This is interpreted as an increased need to stimulate the economy by lowering interest rates.

The MPC stated in its monetary policy decision document, "As downside risks to growth have increased, it was judged appropriate to further cut the base rate to mitigate downside risks to the economy."

Will the Bank of Korea cut rates again next year?

The market expects the Bank of Korea to continue cutting rates until the second quarter of next year.

Among 23 domestic and foreign institutions, 19 forecast an additional rate cut in the first quarter of next year.

Researcher An Yeha from Kiwoom Securities said, "There could be four consecutive cuts through the first quarter and February next year," adding, "I expect three cuts in the first half of next year by May."

Goldman Sachs forecast that the Bank of Korea will lower the base rate to 2.25% next year.

Will bank loan interest rates fall as well?

As the Bank of Korea cuts the base rate, signs of falling loan interest rates are emerging.

This is due to a sharp drop in market interest rates such as financial bonds, which serve as benchmarks for loan rates, over the past few days.

During the first rate cut by the Bank of Korea in October, it was difficult to feel the effect of lower rates due to banks raising their spread rates.

This time, since banks have already raised their spread rates as much as possible,

the second consecutive base rate cut is expected to lead to a decline in loan interest rates for the time being.

KB Kookmin Bank plans to lower fixed-rate mortgage loan interest rates, which use bank bonds as benchmarks, by up to 0.19 percentage points starting on the 2nd.

Loan rates at Shinhan Bank and Hana Bank, which reflect market rates frequently, have also dropped significantly.

Hana Bank's mixed-rate mortgage loan (based on 5-year bank bonds) fell from 4.151?5.651% on the 22nd of last month to 3.962?5.462% on the 29th, a decrease of 0.189 percentage points.

Shinhan Bank's mortgage loan product rates, which follow 5-year bank bonds, also dropped from 4.14?5.45% to 4.00?5.30% during the same period, with the lower end down 0.14 percentage points and the upper end down 0.15 percentage points.

Rate cuts are not all good...Concerns over further exchange rate rise ↑

Yonhap News

Although the Bank of Korea's base rate cut has created conditions for lower loan rates,

we cannot simply rejoice.

This is because of the variable of the exchange rate.

As of the 1st, the exchange rate stands at 1,396.50 KRW per US dollar.

Contrary to expectations that the exchange rate would surge past 1,400 KRW following the rate cut, it has remained stable,

but it is too early to be complacent.

Lowering interest rates widens the rate gap with the US, causing dollar outflows,

which can push the exchange rate even higher.

In this case, it could deal a further blow to the already sluggish domestic stock market,

raising concerns that foreign capital outflows may accelerate.

Looking into the background of the Bank of Korea's surprise consecutive base rate cuts,

we can gain a slight understanding of how deeply the Bank of Korea deliberated before making this decision.

There are many factors to consider, and the economic impact is significant,

so caution is inevitable.

Although there are concerns such as household debt related to rate cuts,

the Bank of Korea's decision to cut the base rate can be interpreted as

an indication that the shadow of recession looming over our economy is that dark.

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