(Bloomberg) -- The timing to consider an interest-rate cut has arrived as inflation cools, even though issues pertaining to financial stability still need to be considered in that discussion, Bank of Korea Governor Rhee Chang-yong said Tuesday.
“Looking at inflation only, the timing is sufficient to consider a rate cut,” Rhee told reporters on the sidelines of an international conference. “An appropriate timing has arrived to think about how to move while looking at financial stability as well.”
Rhee spoke to reporters hours after South Korea announced inflation decelerated in August to 2%, the slowest pace in more than three years. The reading was below the consensus estimate and matched the BOK’s mid-term target.
The BOK has since early 2023 held its key rate at 3.5%, a level it characterizes as restrictive. The BOK cited concerns about financial imbalances stemming from a rise in home prices and mortgage loans when it extended its record-long holding pattern for policy last month.
The BOK’s concern is that rising real estate values might spur more household borrowing. An export rally led by semiconductors and a faster-than-expected economic expansion has given authorities confidence the economy can withstand tight monetary policy as they seek to cool the market.
At the same time, consumption has steadily eased, and credit risks in the construction industry are casting a cloud over the economic outlook. Those domestic factors combined with growing speculation that the Federal Reserve will begin its own pivot later this month have supported speculation the BOK will conduct its own pivot to rate cuts when the board next sets policy on Oct. 11.
Economists are now mostly split on whether the move is likely to come next month or at the next meeting in November, with October having a slight edge in terms of predictions.
What Bloomberg Economics Says...
“The BOK still sees financial stability risks from rapidly rising home prices in Seoul and surrounding areas and associated increases in household debt. But with regulators now leaning against these risks, we think the central bank will feel comfortable to pivot.”
— Hyosung Kwon, economist
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“With inflation under control and the Fed pivoting, we think domestic financial-stability concerns are the main concern that could delay a BOK cut from October to November,” Bum Ki Son, a Barclays Bank economist, said earlier Tuesday. He expects the BOK to pivot next month.
South Korea has one of the highest household debt-to-gross domestic product ratios in the world, an economic distinction that has concerned Rhee since he took office in 2022. Reliance on debt if excessive can exert a drag on long-term economic growth, Rhee has said, warning over the pain of interest expenses.
(Updates with more comments from Rhee and economist, a chart and background)
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