BOK rate cut elusive amid high oil prices, plunging won
The prospect of a key rate cut by the Bank of Korea (BOK) is dimming, clouded by global commodity prices volatility, plunging Korean currency exchange value and slowing disinflation, market watchers said Tuesday.
Anchoring the pessimism are elevated oil prices amid fears of wider war in the Middle East and consequent spike in import prices and shipping costs.
Equally concerning is the accelerated depreciation of the Korean won. It sank to the 1,400-won range against the greenback last week, buffeted by the strong dollar amid global risk-off sentiment fanned by the recently escalated hostilities between Israel and Iran.
Experts say the extended oil price uncertainty will dent the country’s current account surplus with the cost advantages of local exports significantly undermined.
The much-dreaded-yet-highly-probable scenario will fortify overall upward price trajectories, shaving off the country’s GDP. This is a recipe for a perfect storm for the country’s monetary authorities, forming grounds for delaying easing.
The central bank said in February that Korea is likely to see headline inflation edge down to 2.6 percent with $52 billion in the current account surplus this year, as premised on the global oil price staying at $82 per barrel level.
BOK Governor Rhee Changyong said during this month’s policy meeting that a rate cut in the latter half will come under consideration, provided that the inflation in the July to December period averages 2.3 percent per month.
However, new developments have taken shape since.
Korea’s headline inflation came to 3.1 percent both in February and March, reversing months of below-3 percent stable movements. The April figures are expected to climb significantly.
Global oil prices surpassed $90, rattled by reports of Israel’s retaliation against Iran on Friday (local time). The prices increased over 10 percent this year, including about a 3 percent jump last week.
The trajectory of Korean currency against the U.S. dollar is a factor behind rate cuts, according to Rhee, but the bigger question is about oil prices.
“Whether the price would remain below $90 or climb further is of more concern,” he said during a meeting with reporters in Washington on Thursday (local time).
Analysts say BOK’s timeline of rate cut will be pushed back at least about a couple of months, as indicated by Rhee’s reserved stance calling for more confidence about disinflation.
“The market has long expected the rate cut to come in July, but recent developments signal that the easing would come in around August,” Meritz Securities researcher Yoon Yeo-sam said.
Hi Investment & Securities researcher Park Sang-hyun echoed this view, saying, “The Korean currency will crash to 1,400 won against the U.S. dollar if the oil price exceeds $100.”
“This is a major current account balance negative for Korea’s central bank.”