"Expectations for US Rate Cuts End This Year... What About Korea? [Kang Jin-kyu's BOK Watch]"

Three out of ten global investment banks (IB) believe that the US rate cuts have ended this year. They see it as difficult for the Federal Reserve to further lower rates due to the strong US economy and policy uncertainties under the Trump administration. With expectations for US cuts significantly diminished, there are concerns that Korea's rate cut pace may also slow.

According to a recent report titled 'Current US Economic Situation and Evaluation' by the Bank of Korea's New York office, three out of ten global IBs surveyed by the Bank of Korea, including Bank of America, Deutsche Bank, and Nomura, forecast no further US rate cuts this year.

Among them, Bank of America sees the current rate cut cycle as completely over, explaining that the current level of 4.25~4.5% is the terminal rate for this cycle. Deutsche Bank and Nomura expect the rate cut cycle to resume next year.

Morgan Stanley and Barclays predict that the number of cuts this year will be limited to one. Morgan Stanley, which until last month anticipated two cuts this year, adjusted its forecast to one in this survey. Wells Fargo changed its outlook from three cuts to two.

The Fed's benchmark rate forecast reflected in the futures market has also slightly increased. The forecast for the end of the first half of this year rose by 0.10 percentage points from 4.08% on January 29 to 4.18% on February 7, just over a week later. This is 0.32 percentage points lower than the current 4.50%.

The Bank of Korea assessed in the report that "the policy decision statement was perceived as somewhat hawkish (favoring monetary tightening) at the January Federal Open Market Committee (FOMC) meeting where the policy rate was held steady as expected." However, it added that "Jerome Powell's press conference was interpreted as somewhat dovish, having little impact on financial market price variables."

With expectations for US rate cuts waning, the Bank of Korea's concerns are expected to deepen. If Korea accelerates its rate cuts while the US does not, it could lead to increased volatility in the foreign exchange market, such as a sharp rise in the exchange rate. Kim Jin-il, a professor of economics at Korea University, pointed out, "If the number of US rate cuts decreases, the scope of our monetary policy cuts will inevitably shrink."

However, the prevailing view is that the Bank of Korea will cut rates at the upcoming monetary policy direction meeting on the 25th to respond to economic conditions. This is due to growing concerns about the economy, such as consecutive downward revisions of Korea's growth rate forecasts. According to the International Finance Center, BNP Paribas presented Korea's growth rate forecast at 1.6%, down 0.2 percentage points from 1.8% last December. JP Morgan maintained its 1.2% forecast but expects the quarterly path to change. It raised the second quarter annualized rate from 1.5% to 2.0%, but lowered the fourth quarter from 2.3% to 1.5%.

Yoo Young-sang, a researcher at Korea Investment & Securities, explained, "Canada, Mexico, and the Eurozone are lowering their benchmark rates due to concerns about economic slowdown from tariffs," adding, "Korea's situation is not much different, so a rate cut in February is expected." Regarding recent comments by Bank of Korea Governor Lee Chang-yong in a foreign media interview that "a cut at this Monetary Policy Committee meeting is not inevitable," he evaluated it as "an explanation of a principled position."

Reporter Kang Jin-kyu josep@hankyung.com