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Won to soften past 1,400, BOK rate cut likely in Oct: poll

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The won weakens by 0.30% to 1,385,80 to the dollar in early Wednesday trade 

The Korean won is forecast to continue its downward spiral to soften past the 1,400 threshold against the dollar this year, while the Bank of Korea (BOK) will likely make its first rate cut in four years in October, a survey shows.

Fourteen out of 20 economists surveyed by The Korea Economic Daily on Wednesday expect the South Korean currency to break above the 1,400 level briefly to the dollar in tandem with the softening Japanese yen amid a delay in US rate cuts.

In the poll, 18 respondents predict the dollar/won rate to hover between 1,390 and 1,440 in the second half of this year.

Half of them foresee the won recovering trading at 1,350-1,440 at the end of this year. Another eight respondents forecast the Korean currency to stand in the 1,300-1,350 range at the end of this year.

In April this year, the won slid to a 17-month low against the greenback, hitting 1,400 per dollar, its weakest since Nov. 7, 2022.

“The dollar/won rate may rise to 1,440 won due to the growth gap between Korea and the US,” said NH Investment & Securities economist Ahn Ki-tae in the poll. He predicts the won would close 2024 at 1,350-1,400.

For the first and second quarters of this year, NH Investment & Securities had offered the most accurate dollar/won forecasting than other local and foreign peers.

Shin Kwanho, professor of economics at Korea University, expects the won to weaken to 1,420 in the second half, before recovering to 1,350 at the end of this year.

Joo Won, director of Hyundai Research Institute, is more bullish on the won, saying that the dollar/won rate will likely firm up to the 1,200 level at the end of this year after softening to 1,390 following an expected Fed rate cut.

INTEREST RATE CUTS

Ten out of the 20 respondents bet on an October rate cut in the wake of a rate cut by the Federal Reserve that is expected to take place around September., its first rate move since a 25-basis-point hike in July 2023.

Their forecast is contrary to the domestic bond investors’ views. The yield on the most-liquid three-year treasuries stays at 3.1-3.2%, factoring in two rate reductions of the base rate at 3.50%. 

The survey was conducted before the Fed Chair Jerome Powell quashed imminent rate cut hopes on Tuesday. Powell said at a Senate Banking Committee hearing that more good data could open the door to interest rate cuts, citing the cooling labor market and stubbornly high inflation, CNBC reported.

Bank of Korea Governor Rhee Chang-yong

Regarding the timing of a BOK rate cut, 10 out of 19 respondents penciled in October this year.

Five others, including Mirae Asset Securities fixed-income analyst Min Jihee, expect that the BOK may move ahead of the Fed by lowering interest rates as early as in August, citing stabilizing inflation and a possible cut in fiscal spending due to tax deficits.

All the respondents see a zero chance of a BOK rate move this month at a monetary policy meeting on Thursday. Its last rate cut was in May 2020 when it lowered the base rate by 25 basis points.

“Considering recent remarks by BOK Governor that emphasized his confidence in price stability, BOK is unlikely to move ahead of the US in a rate decision,” said Hye Mi You, professor in the College of Economics and Finance at Hanyang University

Park Choonsung, senior economist at Korea Institute of Finance, predicts the Fed will make its first rate cut for 2024 in September and the BOK will follow suit in October.

By comparison, Lee Seung-heon, professor at Soongsil University Graduate School of Business said there is no rush for the South Korea central bank in lowering interest rates, which could fuel housing price and household debt growth.

He had served as BOK’s deputy governor until last year. He bets on a rate cut in November, but said it could be pushed back to next year.

EARLIER RATE MOVE

Seok Byung Hoon, professor in the Department of Economists at Ewha Womans University, said: “Consumer prices are trending toward the (BOK) target (of 2%), and domestic demand and investment are showing signs of stagnation,” he said. “Considering the monetary policy lag, a rate cut needs to take place during the third quarter.”

Thirteen out of the 19 economists and analysts forecast South Korea’s base rate to decline by 25 basis points to 3.25% by the end of this year. That means a majority of them expect the BOK to make one rate cut this year.

Kim Sang-hoon, research head of KB Securities, said the BOK will likely pace itself in slashing interest rates considering that domestic interest rates are lower relative to other major economies and lending rates have already stabilized.

By contrast, six of those surveyed bet on drastic rate cuts to prop up the economy. They foresee the BOK lowering interest rates by 50 basis points to 3.00% by the end of this year.

“Domestic demand will continue to fall towards the end of the year,” said Lee Seung-hoon, a researcher at Meritz Securities. “Back-to-back rate cuts are desirable given the delay in rate cuts.”

Write to Jin-gyu Kang and Dong-Wook Jwa at joseph@hankyung.com
Yeonhee Kim edited this article



Read More: Won to soften past 1,400, BOK rate cut likely in Oct: poll

2024-07-10 09:13:14

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