[Why&Next] "Burden Eased" - August Monetary Policy Board Outlook Seen Through Lee Changyong's Tariff Relief Remarks

"Successful Tariff Agreement Eases Burden for August Policy Meeting"
1. Relief as Tariff Variable Brings No Shocks... Attention on Whether Growth Will Exceed 1%
2. Possibility of Rate Freeze Rises if Responding to Interest Rates... More Time Needed to Confirm Real Estate Sentiment Stabilization

"The successful tariff agreement has significantly eased the burden for the August monetary policy meeting. I thought we would face a difficult situation if the tariffs were not handled properly before the meeting, but you managed a challenging task at a difficult time."

This was the comment made by Bank of Korea Governor Lee Changyong when he met with Deputy Prime Minister and Minister of Economy and Finance Koo Yoonchul on the 7th. When asked further about the meaning of his remark regarding the 'alleviation of the policy meeting burden,' Governor Lee responded, "Since the meeting is approaching, I cannot go into detail, but I had considered many negative scenarios due to tariffs, so this is a fortunate development for our economy." While this may have simply been a greeting to the new Deputy Prime Minister, who has handled major tasks immediately after taking office, the market interprets it as possibly containing implications for the August base rate decision. In fact, government bond yields narrowed their decline in response to Governor Lee's remarks on that day.

Bank of Korea Governor Lee Changyong is welcoming Deputy Prime Minister and Minister of Economy and Finance Koo Yoonchul at the Bank of Korea headquarters in Jung-gu, Seoul on the 7th. Photo by Yonhap News

"No Tariff Shocks"... Will Economic Growth Exceed 1% in August?

On the surface, the lack of significant deviation in the tariff variable from previous expectations can be interpreted as relief that the negative impact on this year's economic growth rate has diminished. The outcome of the Korea-U.S. tariff negotiations was not substantially different from the basic assumptions and premises of the economic outlook released in May. The key premise at that time was that the basic tariff (10%) and item-specific tariffs (25%) would largely be maintained, and that tariffs on semiconductors and pharmaceuticals would be imposed at around 10% during the second half of the year. The mutual tariff of 15% and the 15% tariff on automobiles were within the expected range. Although concerns remain regarding tariffs on semiconductors and pharmaceuticals, the Bank of Korea and external analysts note that these items are to receive 'most-favored-nation' treatment, meaning the terms are not particularly unfavorable.

As a result, the current account balance, including exports in the second half, is expected to perform better than initially feared. Shin Seungcheol, Director General of the Economic Statistics Department 1 at the Bank of Korea, explained, "Although U.S. tariffs will negatively affect exports in the second half, strong semiconductor exports are expected to continue, and dividend income is also expected to increase, so the current account balance should remain solid in the latter half of the year."

If the outcome of the tariff negotiations had been more pessimistic, it might have been necessary to revise this year's already downgraded growth rate even further downward. In that case, it would have approached the 'bad scenario' that Governor Lee mentioned during the July policy meeting. At that time, Governor Lee had assumed a situation where "tariffs rise significantly, household debt is controlled, but real estate prices remain high," and expressed concern that "this could greatly worsen the trade-off between financial stability and growth."

With the uncertainty over tariffs dissipating, the 'growth rate positive factor' has come to the fore. Domestic demand, a pillar of Korea's economic growth alongside exports, is expected to improve compared to previous forecasts as the recovery in private consumption strengthens. This is attributed to a booming stock market, expectations for fiscal spending such as livelihood recovery consumption coupons, and other factors. According to Statistics Korea's nowcast, household credit card spending during the first to third weeks of July increased by 5.2% compared to the same period last year. This is a rebound following an increase from 3.6% in April-May to 4.7% in June. Supporting this, consumer sentiment has also improved. According to the Bank of Korea, the consumer sentiment index in July rose by 2.1 points from the previous month to 110.8, the highest level in four years and one month since June 2021 (111.1).

As a result, the average 2025 economic growth forecast for Korea by major global investment banks (IBs) was raised to 1% as of early August. The forecast has been gradually rising: from 0.8% at the end of May, to 0.9% at the end of June, and to 1.0% in early August. The market expects the Bank of Korea to also raise its forecast for real gross domestic product (GDP) growth this year to around 1.0%. Previously, the Bank of Korea had estimated that the second supplementary budget, which was not reflected in the May outlook (0.8%), would add 0.1 percentage point to this year's growth rate.

U.S. Rate Cut Expectations Grow, but If Focus Remains on 'Easing Economic Concerns' and 'Real Estate Stabilization'...

The market is leaning toward a base rate cut in August, but if Governor Lee's remarks are interpreted in relation to the base rate, there is a possibility of a rate freeze. This is because much of the economic concern stemming from tariff uncertainty has been alleviated, thereby reducing the pressure to cut rates.

The sharp rise in real estate prices, which was a key reason for the rate freeze in July, is also being viewed differently by various observers. Some emphasize that the market has turned cautious since the announcement of strengthened household debt management measures on June 27, while others point out that prices in major areas of Seoul, such as Gangnam-gu, have once again accelerated their increase.

According to Korea Real Estate Board, Seoul apartment prices surged by 0.43% in the fourth week of June, but the pace of increase slowed for five consecutive weeks, reaching a rise of just 0.12% in the fourth week of July. However, in the first week of August, Seoul apartment prices rose by 0.14%, marking a renewed acceleration compared to the previous week. Apartment prices in Gangnam-gu jumped from a 0.11% increase to a 0.15% increase, and the Ma-Yong-Seong (Mapo, Yongsan, Seongdong districts) areas also saw their increases widen by 0.03 to 0.11 percentage points.

The renewed uptick in home prices in Gangnam-gu and other key areas along the Han River is a factor that makes policymakers hesitant to cut rates. This indicates that the 'expectations of rising home prices' highlighted by Governor Lee have not been sufficiently stabilized. Some also believe more time is needed to assess the impact of the government's real estate supply measures, which may be announced as early as this month. Whether the expansion of supply is felt in the market could become a key variable for market stability. The consensus among Monetary Policy Board members is that a rate cut by the Bank of Korea should not become a factor that stimulates market sentiment.

Expectations for a U.S. Federal Reserve policy rate cut in September are higher than ever. Recently, the likelihood of a cut has been bolstered by the 'employment shock' and by the nomination of Stephen Miran, a close aide to U.S. President Donald Trump, as a new Fed board member. However, the interpretation depends on whether the focus is on reducing exchange rate pressures or on the still significant Korea-U.S. interest rate gap. Even if the U.S. cuts its rate by 0.25 percentage points in September, the interest rate differential (based on the upper bound of the U.S. rate) would remain large at 1.75 percentage points.