The case for a fourth-quarter dovish pivot by the Bank of Korea (BOK) is strengthening, underpinned by its policy priority of tempering inflation to a stable 2 percent despite stronger-than-expected growth in the first quarter, according to a senior J.P. Morgan economist, Thursday.
The pace of Korea’s output gap turning positive continues to complicate the inflation dynamics. However, the development is not nearly significant enough to alter the course of monetary easing, according to Park Seok-gil, executive director of JPMorgan Chase 추천 Bank Asia Economic Research. The gap refers to the difference between actual output of an economy as measured by the GDP and its potential. A positive gap means an economy overshooting its full-capacity output, whereas a negative gap means GDP undershooting its potential.
The strong net exports oriented toward the IT sector’s boom cycle are, in his view, expected to offset flagging domestic demand, pushing up the country’s annual GDP growth to 2.8 percent from a year earlier.
“In our view, the risks associated with a too-early shift will remain slightly greater than those of a too-late shift over the next two or three months,” he said during an interview with The Korea Times.
Expectations of a third-quarter rate cut have increased, fueled by monetary easing in advanced economies including Europe as well as advancing views on a near-term rate cut by the U.S. Federal Reserve. Also at play is calls from a top adviser to President Yoon Suk Yeol on an expedited easing to relieve debt service burdens for low-income borrowers and small businesses.
However, the BOK has yet to turn dovish, mindful of the so-called “last mile” risks, as best encapsulated by Rhee’s approach of “Festina Lente,” the classical adage and oxymoron meaning “make haste slowly.”
A premature easing risks not only a delay in tempering inflation to the central bank target of 2 percent, but also elevating foreign exchange volatility and an unmuted growth in household leverage.
In contrast, a stalled easing can sap the economic vigor, as illustrated by the already significant gap between robust exports and softening domestic demand. Also deepening will be financial market vulnerabilities, exacerbated by delinquencies in the real estate market and insolvencies of low-credit borrowers.
All in all, the risks of a premature easing will not be subdued over the next quarter, in his view.
“A significant change in the BOK economic and policy assessment will warrant a rate cut in the third quarter, as summarized by our review of the monetary policy meeting minutes and the BOK version of the dot plot,” he said. “We maintain that signals for a rate cut will intensify in the third quarter. An actual rate cut is likely to occur in the fourth quarter.”
In the May meeting, the central bank concluded that a restrictive stance