BOK faces daunting rate dynamics amid steady Fed

The much-anticipated monetary easing by the Bank of Korea (BOK) is expected to stall, complicated by the higher-for-longer path of the U.S. Federal Reserve (Fed), plunging Korean currency against the U.S. dollar, slowing disinflation and unmuted growth of household debt, market watchers said Thursday.The overnight Fed decision standing pat on the policy rate pushed back the timeline of easing, with solid growth both in labor markets and economic activities underpinning elevated prices of goods and services.The delay prompts BOK to revisit previous policy projections, as reiterated by BOK Governor Rhee Chang-yong who said last month that a rate cut in the latter half will come under consideration, only if the inflation in the period averages 2.3 percent.Korea’s headline inflation was limited to 2.9 percent in April, a stable below 3 percent level. But, about 40 percent year-on-year increases in fresh food and agricultural produce compounded by elevated oil prices are factors for a sustained upward trajectory of prices.Also coming into play is the weak Korean currency crashing to the 1,400 won barrier against the greenback, a major upward import price pressure risk undercutting economic growth.The next rate-setting meeting of BOK is scheduled for May 23. “BOK will not be able to lower rates before the Fed,” Hyundai Research Institute senior researcher Ju Won said.“Market expects the Fed’s dovish pivot will take shape in September at the earliest, meaning Korea’s central bank will follow suit in October or November.”Oil prices surpassing $100 per barrel will altogether push back the easing to well over next year, in his view.“Gas prices remain practically the only strong deterrent against further price increases in the U.S. But fears of wider conflict in the Middle East will lead to higher fuel prices, essentially thwarting disinflation trajectory.”

DB Financial Investment researcher Park Sung-woo said the U.S. consumption will weaken, as inferred from the falling savings rate.“The U.S. Personal Consumption Expenditures report showed savings have fallen to 3.2 percent in March, an indication that U.S. households are dipping into savings instead of robust income as a source of what may appear a robust spending,” he said.“Private consumption will slow down in the months to come, creating a condition conducive to a rate cut or two in the second half. This will factor into the BOK rate considerations.”Similarly, Meritz Securities researcher Stephen Lee said the Fed will deliver three cuts before the year’s end.“Consumers on the mid- to lower-end of the income spectrum will curtail spending in the quarters to come, stymied by depleting savings and debt service obligations. The economic growth will slow down and so will inflation.”Meanwhile, the Organization for Economic Cooperation and Development (OECD) said Korea is expected to grow 2.6 percent this year, up 0.4 percentage points from its previous estimate, and 2.2 percent next year.Growth is projected to be strengthened, the global organization said, underpinned by continued strong exports amid recovering demand for semiconductors, coupled with domestic demand set to bounce back on monetary easing in the second half.Headline inflation hovering around 3 percent is projected to track down throughout the year to be tempered at 2.6 percent this year and 2 percent next year.The OECD recommended Korea spearhead structural reforms in the sectors of fiscal, labor and pension to better respond to the rapid aging crisis.Among viable action plans include fiscal consolidation and increased utilization of foreign and young workers.Pension reforms should prioritize expanded coverage and sustainability, it added.Goods market innovation and simplified government assistance for small and mid-sized businesses can help close the productivity gap between large and small businesses, and ultimately ease the labor market duality concerns.Policy priorities should be geared towards enhancing work-family balance and bolstering climate change responses, it 메이저 added.

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