Expectations are high that the Monetary Policy Committee will freeze interest rates in November
High inflation, household debt, growth dilemma
‘Easing’ mentioned in the October Monetary Policy Committee meeting
With only six days left before the Monetary Policy Committee’s decision on the direction of monetary policy in November, the prevailing view in the market is that the Bank of Korea, which is facing a dilemma, will maintain the current base interest rate for the seventh consecutive time.
Soaring household debt and unrelenting prices increase the justification for raising interest rates. However, the sluggish economy and wariness about financial instability such as vulnerable borrowers and real estate PF are factors that make people hesitate to raise interest rates.
Contrary to the market’s prediction that the U.S. interest rate hike has ended, the fact that the embers of austerity have not been completely extinguished following the Federal Reserve’s declaration of prolonged high interest rates also adds to the persuasiveness of the freeze outlook.
The point to watch is whether there is ‘unanimity’. At the October Monetary Policy Committee meeting, all six members agreed on ‘freeze’, but detailed opinions mentioned that the possibility of both increases and cuts should be left open.
◆ Household debt is at an all-time high… The price is around 3%
The primary reason for raising interest rates is undetermined prices. Korea’s consumer price inflation rate fell to the 2.3% range last July, but after recording 3.4% in August, it continued to remain in the 3% range at 3.7% and 3.8% in September and October, respectively.
The problem is that the recent price path has deviated from the Bank of Korea’s forecast. Last September, the Bank of Korea predicted that the inflation rate would slow down from October, but it showed an upward trend again, exceeding the initial forecast due to the rise in agricultural prices and instability in oil prices and exchange rates.
Another problem is that the downward trend in international oil prices is uncertain. Even with the temporary ceasefire between Israel and the Palestinian armed group Hamas, it is difficult to say that the conflict has completely ended, and the possibility of production cuts by major oil producing countries is not lowering caution about high oil prices.
The resurgence of household debt is also the basis for claims of austerity. In the third quarter of this year, household debt reached an all-time high of 1,876 trillion won. According to the International Finance Institute (IIF), Korea’s household debt ratio is 100.2% of GDP, ranking 4th among 61 major countries.
The Bank of Korea emphasizes that the government’s micro-policies are important for household debt management, but if awareness increases that the problem is serious enough to prevent the government from weakening lending regulations any longer, it will have no choice but to seriously consider an increase.
◆Economic slump forecast ↑… US monetary policy is also uncertain
Nevertheless, there are strong reasons why the Bank of Korea cannot readily raise interest rates. First of all, the economic slump is cited. Our economic recovery is also falling short of expectations due to the slow economic recovery of China, our largest trading partner, the possibility of a cooling of the U.S. economy, and prolonged high interest rates.
The International Monetary Fund (IMF) lowered Korea’s economic growth forecast for next year from 2.4% in July to 2.2% in October. British investment bank Barclays also lowered Korea’s growth rate for next year from 2.3% to 2.0%, predicting a prolonged period of low growth.
Uncertainty in U.S. monetary policy increases the possibility of a freeze. After the FOMC meeting in November, market expectations for a U.S. interest rate cut have grown significantly, but the Federal Reserve is still wary of high inflation and is not letting go of the hike.
In the November FOMC minutes, an opinion was expressed: “If the Federal Reserve’s efforts to control prices are found to be insufficient, further increase interest rates.” This is why it is difficult for the Bank of Korea to cut interest rates preemptively before the Federal Reserve.
Concerns about financial instability also add weight to the freeze forecast. In the first half of the year, the number of vulnerable borrowers reached 3 million, and real estate PF exposure in the non-banking sector was close to 121 trillion won. There are high concerns that an interest rate hike will increase the debt burden and act as a detonator for an economic crisis.
◆ Will there be a minority opinion on the ‘lower rate’ of the Monetary Policy Committee in November?
With a freeze prevailing in the outlook for the Monetary Policy Committee in November, the point to watch is whether the members are unanimous. This is because last October, the Monetary Policy Committee expressed an opinion that mentioned the possibility of an interest rate cut. Usually, minority opinions at the Monetary Policy Committee are taken as a foreshadowing of future interest rate decisions.
In the past, when a minority opinion emerged at the Monetary Policy Committee, interest rates were often adjusted in the direction advocated by the minority opinion as early as the next month or at the latest 4 to 5 months later.
According to the minutes of the October Monetary Policy Committee, a member said, “Downside factors due to the possibility of further rise in oil prices, weakening private consumption recovery, and prolonged austerity measures in major countries are dominant,” and “We will determine whether to tighten or ease further while observing domestic and international financial markets, growth, and price trends.” “It is desirable to decide,” he said.
However, there is an interpretation in the market that it is difficult for an individual’s opinion to lead to an opinion on an actual interest rate cut. This is because easing is mentioned along with austerity, and it is difficult to hastily move interest rates with the recent decision to actively reflect household debt in monetary policy.
Governor Lee also responded to the minority opinion at the Monetary Policy Committee press conference in October by saying, “I am not of the opinion that the interest rate should be lowered immediately,” and expanded the opinion by saying, “I am of the opinion that we should have the flexibility to raise or lower the base interest rate over the next three months.” I was wary of interpretation. ,
Cho Yong-gu, a researcher at Shinyoung Securities, said, “We expect a freeze in that it is difficult to lower interest rates as prices and household debt have not yet stabilized,” and added, “We will issue an austerity message that lowers expectations of an interest rate cut by mentioning household debt and unabated prices.” said.
Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.