BOK faces growing rate cut dilemma as US Fed stands pat
Widening Korea-US rate gap raises concern over capital outflows, market volatility
The US Federal Reserve held its key interest rate unchanged, adding pressure on the Bank of Korea's rate-setting decision later this month.
Following a two-day Federal Open Market Committee meeting, the Fed maintained its benchmark lending rate in the 4.25–4.5 percent range. With the decision, the gap between Korea's key rate and the US rate remains at 1.75 percentage points.
The Fed's pause puts additional weight on the Bank of Korea, which has kept its policy rate at 2.75 percent since February this year. In its most recent meeting in April, the BOK's monetary policy board held the rate steady, citing concerns about a volatile Korean won.
If the BOK cuts the base rate by 0.25 percentage point at its next rate-setting meeting on May 29, the Korea-US rate differential could widen to 2 percentage points — raising the risk of foreign capital outflows.
Despite this concern, the BOK is under growing pressure to lower rates to support the country's slowing economy. In the January–March period, Korea's GDP contracted by 0.2 percent quarter-on-quarter due to sluggish domestic consumption and a slowdown in exports.
While the BOK projected 1.5 percent GDP growth for the year in its February outlook, the first-quarter contraction has darkened the forecast.
On the inflation front, easing consumer prices are giving the BOK more room to consider a rate cut. In April, Korea's consumer prices rose 2.1 percent year-on-year, staying within the 2 percent range for the fourth consecutive month. The central bank's inflation target is 2 percent.
'Don't doubt the possibility of a base rate cut. The BOK can lower the rate depending on the economic circumstances,' BOK Governor Rhee Chang-yong told reporters while attending the Asian Development Bank's annual meeting in Milan.
The recent appreciation of the Korean won has also eased pressure on the BOK. After weakening to as low as 1,487 won per US dollar in April, the currency has rebounded to the 1,400 range.
On Thursday, the won opened at 1,398 per dollar and hovered around 1,395 as of 2 p.m., reflecting gains in Asian peer currencies amid growing expectations that the US will push for dollar depreciation to address its trade deficit.
'The won had struggled to appreciate against the dollar despite a decline in the dollar index, a key measure of the dollar's strength,' said Lee Jung-hoon, an economist at Eugene Investment & Securities. 'The pace of the won's recent appreciation could be concerning, but the current level is not excessive.'
'Given the current dollar index, the won could strengthen further to the low 1,300 range,' Lee added.
While the won's rebound eases some short-term concerns, potential volatility in the foreign exchange market remains. A wider Korea-US interest rate gap could spark increased market instability.
'Volatility in the financial and forex markets could escalate depending on developments in external factors such as US tariff policies, negotiations with major economies and geopolitical risks,' said BOK Senior Deputy Governor Ryoo Sang-dai at a meeting convened shortly after the FOMC decision.
silverstar@heraldcorp.com
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