Bank of Korea Governor Lee Chang-yong suggested a complete re-examination of the timing of future interest rate cuts. This is because the inflation rate in the US remains robust, and Korea’s first quarter gross domestic product (GDP) also grew at a level that exceeded expectations, raising the possibility that the prerequisites for monetary policy changes.
Governor Lee Chang-yong held a press conference for Korean reporters at a hotel in Tbilisi, Georgia on the afternoon of the 2nd (local time) and said, “The situation has changed since the monetary policy direction was announced in April .”
Bank of Korea Governor Lee Chang-yong holds a press conference at a hotel in Tbilisi, Georgia on the afternoon of the 2nd (local time). /Provided by Bank of Korea
Governor Lee assessed that three things have changed since the monetary policy direction decision meeting in April: ▲ the delay before the US interest rate cut ▲ the ‘surprise’ rebound in Korean GDP in the first quarter ▲ heightened geopolitical tensions in the Middle East around Israel and Iran.
Governor Lee first mentioned that the possibility of an interest rate cut in the United States has diminished. He said, “As recently as April, the Federal Reserve gave a pivot signal, so the Bank of Korea established its monetary policy on the assumption that the United States would start lowering interest rates in the second half of the year.” with US economic indicators showing good results, the (Fed) interest rate cut is likely to be pushed back.”
This statement was made in recognition of the increasing possibility that the Federal Reserve’s high interest rate stance will continue for the time being as US prices have recently shown a high upward trend. The US Consumer Price Index (CPI) in March is still in the 3% range, rising 3.2% compared to the same month last year. The personal consumption expenditure (PCE) growth rate, the Fed’s most important indicator, also shows no signs of coming down from the low 2% range.
If the US pivot is delayed, the Bank of Korea’s monetary policy could also be affected. This is because it will be difficult for the Bank of Korea, which must maintain the Korea-US benchmark interest rate gap of 2 percentage points (maximum, Korea 3.5%, US 5.5%) to prevent the possibility of capital outflow, ready for lower interest rates. If the interest rate gap widens, the expected rate of return on Korea’s financial assets will decline relatively, increasing the pressure on foreign investment funds to outflow.
As for the GDP growth rate, he said, “an upward adjustment is inevitable.” Governor Lee said, “The GDP in the first quarter came out much better than expected. He said, “From the Bank of Korea’s point of view, it is time to check what we missed and whether the impact is temporary or will last longer.”
According to the Bank of Korea, GDP in the first quarter of this year grew by 1.3% (preliminary figure) compared to the previous quarter. This corresponds to last year’s growth rate of 1.4%. Accordingly, there is a greater possibility that this year’s annual growth rate forecasts (government 2.2%, Bank of Korea 2.1%) presented by the government and the Bank of Korea will be revised upwards. On the 2nd, the OECD raised Korea’s GDP growth forecast from 2.2% to 2.6%.
If the growth rate is adjusted, there is a high possibility that the price path will also be adjusted. This is because a higher GDP growth rate can lead to an expansion of aggregate demand and stimulate prices. Governor Lee said, “We are in a position where we have to re-examine prices in the second half of the year depending on how the growth rate will change,” and added, “At this point, it has become meaningless to see if the price level has met current expectations.” The Bank of Korea previously predicted that the CPI increase rate in the second half of this year would be 2.3% and the annual increase rate would be 2.6%.
Governor Lee also said that the geopolitical conflict around Iran and Israel could increase the volatility of the exchange rate and oil price. Governor Lee said, “The dollar-earning exchange rate has risen sharply as political tensions around the Middle East have increased since the country’s opening in April,” adding, “As Korea imports a lot of oil, the (economic) volatility in response to oil price shocks is high.”
In fact, the gain-dollar exchange rate and oil prices are driven rapidly depending on the situation in the Middle East. In the middle of last month, immediately after the Iranian air attack against Israel, the exchange rate was above 1,400 won at one point during the day, and the international oil price (Brent crude oil) also rose to $90 per barrel . However, as the conflict between the two countries went into a lull, the exchange rate fell back to the won range of 1,370, and oil prices fell into the mid-80s.
Finally, Governor Lee said he would look at the data and find the best possible combination with the members of the Monetary Policy Committee. Governor Lee said, “I think we will have difficult discussions with the members of the Monetary Policy Committee over the next two weeks,” and added, “I am not sure whether the members of the Monetary Policy Committee will continue to do the same decisions as they made in the past. “Members of the Monetary Policy Committee will also have mixed feelings,” he said.
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