For the first time in four and a half years! Korea cuts interest rates!

Korea's central bank cut interest rates for the first time in four-and-a-half-year years on Friday, ending a 21-month streak of keeping rates unchanged. Korea's central bank said monetary policy will shift from curbing inflation to focusing on reviving economic growth.

Cut rates by 25 basis points

The Bank of Korea cut its benchmark interest rate by 25 basis points to 3.25% in its monetary policy review.

Korea inflation and benchmark interest rate chart

The Bank of Korea said that while inflation has shown a clear trend of stability, as the government's macroprudential policy continues, household debt growth has begun to slow and risks in the foreign exchange market have eased. Therefore, the Committee considered that it would be appropriate at this time to ease the restrictive monetary policy slightly and to examine its future implications.

The Bank of Korea also said that the information currently available indicates that the global economy continues to maintain a moderate growth trend despite increased economic uncertainty surrounding major countries. At the same time, inflation has maintained a slowing trend. In global financial markets, long-term government bond yields and the dollar index rebounded after falling due to expectations of the pace of interest rate cuts by the Federal Reserve of United States, geopolitical risks in the Middle East, and China's economic stimulus. The global economy and financial markets will be affected by changes in the economic conditions and monetary policies of major economies, as well as geopolitical risks and political situations in major countries.

In terms of the domestic economy, Korea's exports continued to grow, but domestic demand recovered slowly. Looking at the state of the labor market, the unemployment rate has remained low, although the growth trend in the number of employed people has gradually slowed down. Looking ahead, the domestic economy is expected to continue its moderate growth trend. However, it was judged that the uncertainty surrounding the growth outlook (expected to be 2.4% this year and 2.1% next year) increased compared to August due to the delay in the recovery of domestic demand. The future path of economic growth is likely to be affected by the speed of recovery in domestic demand, the economic conditions of major countries, and the trend of IT exports.

The Bank of Korea stressed that the current inflation shows a clear trend of stability. Consumer price inflation fell to 1.6% in September due to a sharp drop in oil product prices, and core inflation (excluding changes in food and energy prices in the CPI) has slowed to 2.0%. Short-term inflation expectations have also fallen to 2.8%. Looking ahead, inflation is expected to remain stable and demand pressures are low. Consumer price inflation is expected to fall below the 2% level for some time. For next year, both headline and core inflation are expected to be broadly in line with previous forecasts of 2.1% and 2.0%, respectively. However, there is a high degree of uncertainty in global oil prices due to developments in geopolitical risks in the Middle East, exchange rate movements, and adjustments in utility charges.

In the financial and foreign exchange markets, Korea's long-term government bond yields rebounded after a decline, in line with changes in domestic and foreign monetary policy expectations. The exchange rate of the South Korean won against the US dollar fluctuates greatly due to the fluctuation of the US dollar and geopolitical risks. In terms of the real estate market, house price growth in Seoul and its surrounding areas has slowed and transaction volumes have declined, while the rest of the country has remained sluggish. As a result, the growth of household loans has also shrunk sharply.

Central banks around the world have entered a period of easing

After the Federal Reserve cut interest rates by 50 basis points at its September meeting, many central banks began to follow suit.

In September, the European Central Bank, the Bank of Canada, and the Central Bank of South Africa cut interest rates by 25 basis points. Subsequently, the central banks of Indonesia and the Philippines joined the ranks of rate cuts. On 9 October, the Reserve Bank of New Zealand cut interest rates by 50bp to 4.75%. The central bank also assesses annual consumer prices within the 1% to 3% inflation target range.

After the Fed cut interest rates aggressively, developed and emerging market central banks also have more room for monetary policy to adopt more flexible monetary policies depending on the dynamics of economic developments and respond to economic pressures without worrying too much about external equilibrium. With the Fed's "big turn" sounding the easing charge, the tide of interest rate cuts is "getting better".

The Bank of Japan is one of the few major central banks in a rate hike cycle.

On Tuesday, a former official in charge of monetary policy at the Bank of Japan said that the new prime minister of Japan, Shigeru Ishiba, would not block the Bank of Japan's path to raising interest rates, and that the next rate hike by the Bank of Japan would be most likely in January.

Eiji Maeda, a former Japan official, said on Tuesday: "My current view is that a rate hike in January is the most likely. This means that about half a year has passed since the rate hike in July this year, and it will also be the time for the Bank of Japan to release its latest economic forecast. ”

Maeda previously served as chief economist at the Japan central bank and led the Japan central bank's crisis response efforts. He stepped down in May 2020 and currently serves as Head of the Chibagin Research Institute.

He mentioned that before the next rate hike, the Bank of Japan will focus on three key developments: the United States presidential election, Japan service price trends this fall, and the momentum of annual wage negotiations next year. Maeda said that depending on the impact of these factors, the timing of the Japan BOJ's rate hike may be adjusted forward or backward.

"These factors will gradually become clearer, so depending on these factors, the rate hike may also take place in December this year or in March next year." Maeda said.

The next interest rate decision meeting of the Bank of Japan is on October 31, but the probability of the Bank of Japan taking action by then is "almost zero". Maeda explained, "If they raise interest rates [in October], it will give the impression that they are raising rates every three months," Maeda explained. "Most Japan central bank watchers agree with Maeda that the likelihood of a rate hike in October is very low.

Editor-in-charge: Ye Shuyun

Proofreading: Ran Yanqing

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