Jul
Bank of Korea maintained its base rate, a widely expected move that coincides with growing anticipation of a potential shift toward policy easing in the upcoming months. On Thursday, the Bank of Korea (BOK) left its benchmark seven-day repurchase rate unchanged at a 15-year high of 3.50% for the twelfth consecutive time. This marks the longest streak in history for unchanged rates.
Unanimous Decision Amid Divergent Future Views
All 26 economists surveyed by The Wall Street Journal predicted that the bank would hold rates steady in July. Some anticipated a rate cut as early as August, while most forecasted the commencement of policy easing in October or November. Bank of Korea Governor Rhee Chang-yong stated that Thursday’s decision was unanimous. However, the seven-member policy board was split on future rate adjustments. Two of the six board members, excluding him, were open to a possible rate cut within the next three months. Four members preferred to maintain the current rate in the near term.
Rhee’s Remarks on Market Expectations
Rhee remarked that predicting the timing of rate reductions is difficult and that market expectations for a rate cut are somewhat excessive. Economists suggest that the Bank of Korea may wait for second-quarter growth data and July inflation figures. This approach allows for a better assessment of the South Korean economy before making any rate changes.
UK Retail Sales Rebound Strongly in May Amid Economic Optimism
In a significant turnaround from April’s rain-dampened figures, UK retail sales soared in May, marking the sharpest increase since January.
Monitoring Global Influences
BOK policymakers are also closely monitoring the upcoming U.S. Federal Reserve policy meeting scheduled for later this month. Easing inflation in South Korea has increased pressure on the Bank of Korea (BOK) to lower interest rates. The country’s headline inflation slowed to an 11-month low of 2.4% in June.
Economic Challenges and Domestic Concerns
Sluggish domestic demand and signs of financial strain caused by higher interest rates further support the case for reducing borrowing costs to stimulate growth in the country. Nevertheless, the Bank of Korea (BOK) is expected to proceed cautiously. They are wary of hastening rate cuts due to uncertainties surrounding U.S. monetary policy and high levels of household debt in South Korea.
Economic Projections and Future Outlook
The Bank of Korea projects South Korea’s economy to grow by 2.5% this year, with inflation expected to average 2.6%. Economic growth is anticipated to slow to 2.1% next year, with inflation likely easing to 2.1% as well. ANZ economist Krystal Tan indicated that since no dissenters called for a rate cut at Thursday’s meeting, a policy pivot is more probable in October than at the August meeting.
Preparing for a Policy Shift
“The BOK is laying the groundwork for a policy shift,” Tan said. “However, there was little indication that the BOK is in a hurry to cut rates.” The central bank’s cautious approach underscores the balancing act it faces in supporting economic growth while managing financial stability concerns.
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