Bank of Korea (BoK) Governor Rhee Chang-yong explained the reasons behind the interest rate cut decision in his post-policy meeting press conference on Tuesday.
Additional takeaways
Tuesday's rate decision was unanimous.
Interest rates for special loan programme also lowered.
Four board members said current policy rates could be maintained for the next three months.
Two board members said further rate cuts possible for the next three months.
Market consensus expecting two more rate cuts this year not too different from BoK’s views.
US Dollar-Won market volatility somewhat eased.
Need support from fiscal policies to grow more than 1.5% this year.
Consumer sentiment deteriorating, construction sector not doing well.
The South Korean central bank resumed its interest rate-cutting cycle by lowering the policy rate by 25 basis points (bps) to 2.75% after unexpectedly holding it at 3% in January. The BoK also revised its growth forecasts lower this year to 1.5% from 1.9% while keeping the inflation forecast at 1.9% for this year and next.
USD/KRW reaction to the BoK’s policy event
USD/KRW came under intense selling pressure in a knee-jerk reaction to the BoK’s expected rate cut decision and tested the 1,428-support area before rebounding swiftly to regain the 1,429 level. At the press time, the currency pair trades 0.08% higher on the day at 1,429.93.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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