On July 3, Meritz Securities announced that it is raising its forecast for this year’s base interest rate back up to 2.25%, after previously lowering it to 2%. The company now expects one additional rate cut within the year.
Yoon Yeosam, a researcher at Meritz Securities, stated in a report titled "Korea Base Rate Pause at 2.25%!" published on the same day, "The domestic economy, which was once worried about negative growth in the first quarter and annual growth in the 0% range, has shown significant changes since the presidential election."
First, Yoon noted, "Until the end of May, the consensus was that the base rate would fall below 2% this year." He referred to the fact that Meritz Securities had previously adjusted its rate forecast down to 2% in April following comments from the Bank of Korea governor at the Monetary Policy Board meeting, which suggested that first-quarter growth would be negative.
He added, "The market atmosphere has changed rapidly since the presidential election. While it cannot yet be said that the Bank of Korea’s monetary easing stance has ended, expectations for further rate cuts have retreated, and the market now only reflects the possibility of a cut to around 2.25% within the next year." Korea’s current base rate is 2.50%.
Yoon explained that the retreat in rate cut expectations is "unrelated to the administration and is instead due to economic conditions." The first reason he cited was the increased expectations for economic recovery following the launch of the new government. Previously, Meritz Securities had also raised its growth forecasts for Korea from 0.8% to 1.0% for this year, and from 2.1% to 2.2% for next year.
He stated, "The key is fundamentally the economy. Concerns over U.S. tariffs have eased somewhat, leading to stronger-than-expected exports in the second quarter, and expansionary fiscal policies, including an extra budget, have led to marked improvements in sentiment indicators." He added, "With external risks receding and the new government’s expansionary fiscal policy benefiting the stock market, the KOSPI has surpassed the 3,000 mark."
The second reason for the retreat in rate cut expectations is stabilization in the real estate market and household debt. Yoon explained, "While improved growth forecasts, stock prices, and sentiment indicators are important, the core issue is household lending and financial stability, particularly centered on the real estate market." He added, "Even the President has emphasized that 'housing is for living, not speculation,' indicating strong regulatory measures."
Accordingly, there is now an expectation that, after one more rate cut, the base rate will enter a pause period until next year. Yoon stated, "Considering this year’s growth in the 1.0% range and the aspect of financial stability, we have raised our base rate forecast back to 2.25%." He emphasized, "If the main reason for a rate cut this year was economic slowdown, even as we confirm a bottom recently, I believe it is appropriate to quickly lower the rate to 2.25%, which is the midpoint of the neutral rate promised by the Bank of Korea."
However, he assessed that there is growing uncertainty regarding the timing of any additional rate cuts. He pointed out, "Initially, a fourth-quarter rate cut was considered a close call depending on expectations for a U.S. rate cut, but recently, from a financial stability perspective, we must also consider the possibility that a rate cut in August may not be easy." He added, "It will be important to see whether expectations for U.S. monetary policy are revived during July."
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