When will the BOK begin rate cuts? Analysts weigh in on July or August

U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on March 20, 2024. / Yonhap News

Federal Reserve officials reaffirmed predictions to cut interest rates three times this year, sending U.S. stock markets to record highs and fueling expectations for the Bank of Korea to begin rate cuts in the second half of this year.

The Federal Open Market Committee voted unanimously to hold the benchmark federal funds rate at a 23-year high of 5.25% to 5.5% on Mar. 20.

The Fed raised its outlook for U.S. economic growth to 2.1% this year, up from the previous forecast of 1.4%. The headline inflation projection for the end of the year remained unchanged at 2.4%.

While Fed Chair Jerome Powell said the central bank is not ready to lower interest rates any time soon, the Fed’s bullish outlook for economic growth has Wall Street betting on rate cuts as early as June. Investors in the futures market raised the possibility of the Fed cutting rates in June to 75% from 50% at the start of the week.

“Inflation is moving down gradually on a sometimes-bumpy road toward 2%,” Fed Chair Jerome Powell said in the press conference after the FOMC announcement. Powell said the committee wants to make sure inflation is headed toward the central bank’s 2% target before lowering interest rates.

“We don’t really know if this is a bump on the road or something more,” he said. “Fortunately, with the economy growing, we can approach that question carefully and let the data speak on that,” he added, stating there isn’t much urgency regarding rate cuts.

With the Fed gearing up for potential rate cuts in the second half of this year, markets are expecting the BOK to follow suit. But analysts predict that the BOK is unlikely to cut rates as aggressively as it did when raising interest rates. South Korea’s central bank is focused on maintaining a restrictive monetary policy to bring down inflation to its 2% target while reigning in household debt, which has been growing since the beginning of the year.

The BOK initiated interest rate hikes in August 2021, six months ahead of the Fed. Then-BOK Governor Lee Ju-yeol emphasized the importance of an early rate increase, pointing to burgeoning household debt and inflationary pressures. The central bank has since raised interest rates from 0.5% to 3.5%, but persistent household debt and the possible risk of stimulating the real estate market continue to complicate decisions regarding rate cuts.

“Rate cuts in the first half of the year are unlikely to happen,” BOK Governor Rhee Chang-yong said during a press conference after the monetary policy board’s rate decision in February, ruling out the possibility of an early rate cut in May. But he added that the central bank may change course depending on the revised May economic forecast.

Analysts expect the BOK will take a wait-and-see approach and begin rate cuts in July or August after the Fed makes the first move.

“The BOK’s first rate cut will most likely take place in August after assessing trends in inflation and household debt,” said Cho Yong-gu, an analyst at Shinyoung Securities. “The Fed is expected to begin lowering rates in July, which gives the BOK time to reaffirm its stance before rate cuts.”

Analysts expect the Bank of Korea to begin rate cuts in July or August. / News1