On Tuesday, Goldman Sachs, a central U.S. investment bank, stated that the Bank of Korea’s Monetary Policy Committee is expected to lower the base interest rate from 3.0% to 2.75% this Thursday.
In its report, Goldman Sachs analyzed the fact that the Monetary Policy Committee will likely adopt an accommodative monetary policy to address weakening growth momentum in the South Korean economy and potential downside risks to domestic demand.
Kwon Goo Hoon, a senior economist at Goldman Sachs, noted, “Political tensions are escalating, and recent credit card spending data indicates that private consumption is further slowing. This reflects a freeze in investment sentiment.”
He emphasized that an accommodative monetary policy is necessary to revive domestic demand and restore investor confidence. He also pointed out that the decline in inflation strengthens the case for a rate cut.
According to Kwon, headline inflation has recently stabilized below 2%. He attributes this to several factors, including a slowdown in job growth, restrained wage increases, and the government’s decision to postpone hikes in public utility rates.
Concerning the rising USD-KRW exchange rate, Kwon assessed that such burdens can be managed. He explained, “The National Pension Service can increase the dollar supply in the foreign exchange market through strategic hedging, and the relaxation of regulations on short-term foreign currency borrowing by banks reduces the constraints on the Bank of Korea’s rate cuts.”
The report forecasted that after South Korea’s three consecutive rate cuts in October, November, and January 2024, the pace of monetary easing would moderate in the coming months. The base interest rate is projected to be further reduced by 25 basis points in the second and third quarters, bringing the final rate to 2.25%.
