SEOUL, September 18 (AJP) - The Bank of Korea is widely expected to cut its benchmark interest rate as early as next month, after the U.S. Federal Reserve lowered borrowing costs for the first time in nine months, easing pressure on Korea’s currency and capital markets.
The Fed’s decision on Wednesday (local time) to trim its policy rate by 0.25 percentage points to a range of 4 to 4.25 percent narrowed the gap with South Korea’s rate from a record 2 percentage points to 1.75. That reduction has given the BOK more space to address domestic economic challenges, which include sluggish growth, weak consumption and mounting financial risks.
“If the U.S. rate cut is implemented and foreign exchange market volatility eases, we will have more room to focus on domestic conditions,” BOK Deputy Governor Park Jong-woo said in a recent monetary policy briefing.
South Korea’s economy, Asia’s fourth-largest, has been struggling to regain momentum amid soft exports, tepid domestic demand and a prolonged slump in consumer sentiment. A prolonged downturn in the semiconductor cycle — the country’s top export driver — has further weighed on business investment and household income.
Adding to the pressure, private consumption has stagnated under the weight of high borrowing costs and record household debt.
Analysts say this backdrop makes a rate cut at the BOK’s Oct. 19 meeting increasingly likely.
“From a growth perspective, we also need to lower our rates,” said Joo Won, an economist at the Hyundai Research Institute, predicting an October move. An Jae-gyun, a senior researcher at Korea Investment & Securities, argued that a rate cut paired with government fiscal stimulus would amplify the impact of spending.
Still, policymakers face a delicate balancing act. South Korea’s housing market has defied tighter financial conditions, with Seoul home prices continuing to climb and speculative demand showing signs of revival. A rate cut could stoke further borrowing and worsen financial vulnerabilities.
“As the upward trend and expectations for further rises in Seoul’s housing prices are still significant, it is necessary to decide on the timing of an additional rate cut after examining the effects on housing price expectations,” BOK board member Lee Su-hyung cautioned in a report last week.
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