The Korea Herald


[Editorial] Doing it right

Bank of Korea stays cautious about its rate decision following another US rate freeze

By Korea Herald

Published : June 14, 2024 - 05:29

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South Korea’s financial authorities are now expected to ponder the timing of a rate cut in a more cautious way as the US Federal Reserve decided Wednesday (US time) to freeze the benchmark interest rates at between 5.25-5.5 percent for a seventh-straight time.

The Fed’s decision came after fresh inflation data issued earlier in the day slightly moderated last month but still above its 2 percent inflation target. The US benchmark rates have been kept unchanged since July last year.

The Federal Open Market Committee members’ latest economic projections now signal that the federal funds rate would stand at 5.1 percent at the end of 2024, which translates into a single quarter-point rate cut this year -- fewer rate cuts than previously estimated.

Fed Chair Jerome Powell said the central bank was prepared to respond to changes in the labor market and inflation data. “Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate,” he said, referring to the efforts to seek both maximum employment and its inflation objective.

The latest Fed rate freeze has put the gap between the key rates of Korea and the US at up to 2 percentage points. The Bank of Korea kept its key rate unchanged at 3.5 percent last month, maintaining the same stance for the 11th session straight to grapple with inflationary pressure.

As the Fed is now likely to opt for one rate cut toward around November or December, the BOK has come under more pressure to make a choice between a wait-and-see approach and a proactive rate cut aimed at spurring the Korean economy move forward.

There have been two opposing views about the central bank’s direction in Asia’s fourth-largest economy. Proponents for faster monetary loosening argue that the country badly needs lower borrowing costs to help companies better confront the sluggish domestic demand. Opponents, however, claim that a premature cut could backfire in a way that makes it harder for authorities to tackle economic troubles later.

On Thursday, Finance Minister Choi Sang-mok said an “external safety net” should be strengthened to better respond to uncertainties stemming from interest rate trends in the US and other nations.

“There are uncertainties about when and how much the US will cut interest rates,” Choi said during an emergency macroeconomic meeting. “We cannot rule out the possibility of growing volatility in the global financial market."

Choi’s comment on the external safety net is interpreted as the government’s determination to beef up vigilance against volatility and consider tax incentives and other measures to support companies and the people.

Although the Fed policymakers are expected to slash the interest rates later this year, the Korea’s central bank is still cautious about cutting the rate.

On Tuesday, BOK Gov. Rhee Chang-yong elaborated on the dilemma at the central bank’s event.

“If the change in monetary policy comes too late, the domestic recovery will slow and delinquency rates will continue in a way that destabilizes the market,” Rhee said. But a premature switch in the monetary policy could result in a slower decrease in consumer prices while adding to foreign exchange volatility and expanding household debt, he added.

Since February, the BOK has been included “foreign exchange volatility” in its monetary policy notes, as the Korean won keeps losing its value against the US dollar. Analysts say that a decoupling in interest rates between Korea and the US could lead to extra depreciation of the Korean currency.

Rhee said a balanced decision by the central bank is now in order, quoting the first Roman emperor Augustus’s motto, “festina lente,” or “make haste, slowly.” Given the complex economic situation, doing it right does appear to be more important than doing it quickly for the Korean economy.