Bank of Korea Expected to Hold Rates Steady for Remainder of Year, Anticipated Cuts in Early 2024: Reuters Poll

By Anant Chandak

BENGALURU – The Bank of Korea is poised to maintain its key policy rate at 3.50% during its upcoming meeting, marking the fifth consecutive time this rate has remained unchanged. This decision is rooted in the continuing decline of inflation and persistently high household debt levels.

Recent data reveals inflation has dropped to 2.3% as of July, the lowest in over two years and nearing the central bank’s target of 2.0%. Financial markets have indicated that the recent tightening cycle—which raised rates by 300 basis points over 17 months—has come to an end.

While the central bank anticipates an increase in inflation in the months ahead, the combination of slowing economic growth and elevated household debt is expected to dissuade the BOK from implementing further rate hikes. Instead, a more hawkish approach is likely to be adopted to prevent markets from anticipating rate reductions.

A poll conducted from August 14 to 21 showed that all 43 economists surveyed expect no shift in the 3.50% base rate during the upcoming meeting on August 24. Kong Dong-rak, an economist at Daishin Securities, commented, “Following the last hike in January, we expect the base rate to remain unchanged at least until year-end. As consumer price inflation has dipped into the 2% range, the flexibility to react to inflation is gradually diminishing.”

He added that should concerns about economic slowdown intensify, expectations for a base rate cut will likely rise, particularly in financial markets. However, he emphasized that such cuts would probably not occur until 2024.

Among economists forecasting rates until the end of 2023, over three-quarters—31 out of 40—predicted the base rate would remain at 3.50%. The remaining economists forecasted a decline to 3.25% or lower.

Similar to other central banks in the region, the BOK is not expected to respond to rising inflationary pressures or slowing economic growth trends, exemplified by a significant 25.1% drop in exports to China last month.

Paik Yoon-min of Kyobo Securities stated, “While the Bank of Korea has not ruled out the possibility of further rate hikes, we think actual increases are unlikely. Internal sources of pressure for rising interest rates are limited when excluding external influences.”

He noted that it is challenging to proactively respond to either policy direction. However, if inflation remains aligned with BOK’s expectations, the demand for easing monetary tightening could increase amid mounting downward economic pressures and financial instability.

A strong majority of economists—26 out of 34—project at least one 25 basis point cut to 3.25% in the first quarter of the following year, coinciding with anticipated policy easing by other central banks in the region.

Median forecasts suggest the BOK will gradually reduce the base rate next year, targeting 3.00% in the second quarter and further lowering it to 2.75% and 2.50% in the subsequent quarters.