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

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

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

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

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

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 closing out 2024 in the 1,350-1,400 range.

In the first and second quarters of this year, NH Investment & Securities had delivered more accurate dollar/won forecasting than its 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 the Hyundai Research Institute, is more bullish, saying that the won will likely firm up to the 1,200 level per dollar at year's end 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 US Federal Reserve that is expected to take place around September, its first rate move since a 25-basis-point hike in January 2023.

Their forecast runs contrary to 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 Fed Chair Jerome Powell on Tuesday quashed hopes of an imminent rate cut. At a Senate Banking Committee hearing, Powell said that more good data could open the door to interest rate cuts, citing the cooling labor market and stubbornly high inflation, CNBC reported.

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

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

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

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

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

In contrast, Lee Seung-heon, a professor at Soongsil University Graduate School of Business, said Korea's central bank is in no rush to lower interest rates, which could fuel housing price and household debt growth.

Lee served as the BOK's deputy governor until last year. He bets on a rate cut in November, but said the timing could even be pushed back to next year.

EARLIER RATE MOVE

Seok Byung Hoon, a professor in the Department of Economics 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. Considering the monetary policy lag, a rate cut needs to take place during the third quarter.”

Thirteen of the 19 economists and analysts forecast that Korea’s base rate would 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 at 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.

In contrast, six of those surveyed bet on drastic rate cuts aimed at propping up the economy. They predict the BOK lowering interest rates by 50 basis points to 3.00% by year's end.

“Domestic demand will continue to fall toward 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