"U.S. to cut rates three times this year"…Will the Bank of Korea also speed up?

A forecast has emerged that the U.S. central bank (Fed) will lower its policy rate at the remaining three monetary policy meetings this year. With the Fed's easing stance, the Bank of Korea is also expected to accelerate additional cuts to its policy rate.

According to the Bank of Korea's New York office on the 12th, out of 10 major global investment banks surveyed as of the 5th, six forecast three rate cuts by the Fed this year. This means policy rates would be lowered at all remaining FOMC meetings this year (September, October, December). The other four expected two cuts this year. Half of those (two) anticipated 3–4 cuts next year, expecting a larger-scale monetary easing than this year.

The market sentiment reflects this. The year-end policy rate implied by the federal funds rate futures market fell from 3.82% in early July to 3.62% as of early September, a drop of 0.2 percentage points. About one cut has already been priced into the market.

The increase in the expected number of Fed cuts this year is due to recent U.S. economic indicators.

So far, investment banks had adjusted their expectations for cuts downward as U.S. labor indicators such as the unemployment rate remained resilient and inflation did not fall easily. However, recently labor indicators have been significantly revised downward and signs of slowing inflation have been observed, creating a favorable environment for monetary easing.

On the 9th (local time), following the annual benchmark revision of U.S. employment statistics, nonfarm payrolls (NFP) for the period from Q2 last year to Q1 this year were revised down by a total of 911,000 (-0.6%). This amounts to about 76,000 fewer jobs per month on average.

Citi estimated, "If the trend of overstatement in nonfarm payrolls continues, the current monthly employment (3-month moving average) would be around -47,000." It added that this revision to the statistics is "insufficient for the Fed to carry out a 'big cut' in September (a 0.5 percentage point cut at once), but sufficient for Chair Powell to hint at the possibility of further rate cuts."

Bloomberg analyzed that "this is the largest employment revision since 2000 and the second consecutive year of major downward revisions, indicating that employment growth was significantly overstated ahead of the summer's full-scale employment slowdown and that last year's employment did not even reach half the level necessary to reliably sustain the unemployment rate (break-even)."

The possibility of an additional Bank of Korea cut in October is also increasing. The BOK lowered its policy rate to 2.5% per annum in May and then held it steady in July and August. If the Fed lowers rates this month and signals further cuts, the BOK could be relieved of the burden from the historically wide Korea-U.S. rate gap (2 percentage points).

Nomura basically expects the BOK to cut the policy rate in October and February next year, while noting that depending on domestic economic conditions, there is a partial possibility of consecutive cuts in October–November.

The key factors are the housing market and household loans. When releasing household loan statistics, the Bank of Korea said, "Considering the lag between housing transactions and their translation into loans, household loan stress could persist until October."

If, before the Monetary Policy Board meeting on October 23, house prices in some Seoul areas such as Gangnam and Songpa are not stabilized or the upward trend in household loans in the financial sector is not contained, further cuts by the BOK will be difficult regardless of the Fed's easing stance.

Song-ryeol Lee, Hankyung.com reporter yisr0203@hankyung.com