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Bank of Korea to hold rates, first cut expected in Q4

May 21, 2024

Key points:

  • The Bank of Korea will hold the base rate at 3.50% on May 23.
  • A half-point rate cut is expected in Q4 2024 after potential policy easing from global peers.

The Bank of Korea (BOK) will keep its key policy rate unchanged at 3.50% on May 23, marking the 11th consecutive meeting with no change. The BOK is expected to maintain this rate through the next quarter, with a half-point cut anticipated in Q4 2024, following expected policy easing from other central banks globally.

South Korea’s fast growth reduces need for rate cut

South Korea’s economy grew at its fastest pace in over two years last quarter, driven by robust exports. This growth suggests there is no immediate need for a rate cut. Elevated inflation and a weak currency support the view of maintaining higher rates for longer.

The South Korean won has already depreciated nearly 5% this year, and any further decline would likely increase import costs and heighten inflationary pressures.

Chart displaying USD/KRW exchange rate at 1360.33 with a trend of 0.20%, reflecting market reactions to the Bank of Korea's decision to hold interest rates, with the first cut expected in Q4. The chart features moving averages (MA) and MACD indicators, highlighting the currency pair's performance. Image hosted by VT Markets, a forex CFDs brokerage.

Picture: Upside prevails as long as 1352.80 is support. Download the VT Markets app.

Economists widely expect the BOK to leave the base rate at 3.50% on May 23. Median forecasts indicate interest rates will remain unchanged through the third quarter before a 50 basis-point cut by the end of 2024. This contrasts with earlier predictions that anticipated 25 basis-point cuts in both Q3 and Q4.

Considering the uncertainty of the timing of the Federal Reserve‘s interest rate cut and the higher dollar exchange rate level, the monetary policy committee will likely maintain its cautious stance in lowering interest rates.

BOK expected to lag behind ECB and Fed

The BOK, which initiated its policy tightening cycle in August 2021, is expected to lag behind its global peers regarding the timing of the first cut. The European Central Bank and the Federal Reserve are projected to begin easing in June and September, respectively.

The BOK is likely to signal that a rate cut is unlikely in the next three months but still possible by the end of 2024. Growth momentum remains two-tiered with strong net exports, versus a still-soft domestic outlook.

The soft domestic demand growth outlook and relatively muted perceived growth still suggest that the next move will be a cut.

Also read: South Korean shares rise on Fed rate cut hopes and positive U.S. stocks

The Bank of Korea’s decision to hold rates steady reflects a cautious approach amidst global economic uncertainties.

The expected rate cut in Q4 2024 will depend on domestic demand trends and inflationary pressures, influenced by the performance of the won and global policy movements. Traders and investors should monitor these factors closely as they will shape the BOK’s future monetary policy decisions.

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