For South Korea’s economy, it’s not quite a case of first in, first out. But it could be close: Despite some bullish growth forecasts, interest-rate cuts are coming. The central bank took laudable early steps to contain inflation, while the Federal Reserve still insisted that climbing prices would be a “transitory” phenomenon. Now is the time for Seoul to relax — a bit.
There’s little question that the country has had a strong run in recent years. An export powerhouse, especially in semiconductors, it prospered during the work-from-home regime that typified the early stages of the pandemic. More recently, it emerged as a winner from the artificial intelligence boom. The labor market is resilient; unemployment is below 3%.
That doesn’t mean everything is rosy. Gross domestic product dipped slightly in the second quarter compared with the brisk expansion of the previous three months, according to figures released on Thursday. While activity is expected to recover, the economy can certainly use a nudge. Fortunately, inflation is receding nicely. Bank of Korea Governor Rhee Chang-yong has warned investors not to get too carried away with bets on lower rates. He is too cautious.
Make no mistake, easier policy is coming, maybe as soon as next month. Projections released by the central bank’s policy committee a few weeks ago showed that two members would be comfortable with lower borrowing costs. Strong signals that the Fed is preparing to trim its own rate should make arguments for action in Seoul irresistible. (Bill Dudley, who led the New York Fed and is now a Bloomberg Opinion columnist, wrote that officials should reduce rates this week and not demur until September.)
Rhee is a classics man. He is fond of citing Augustus, perhaps the greatest of the Roman emperors. In particular, Rhee has taken a shine to the phrase “Festina Lente,” which roughly translates as “make haste slowly.” When it comes to deliberating on the cost of money, there has been too much of the slow and insufficient haste. That can be corrected.
This isn’t just a case of yet another emerging market taking a cue from the Fed. Korea deserves credit for spotting the inflation surge in 2021. The BOK began tightening in August of that year, seven months before the US and almost a year before the European Central Bank. A noisier hawk, New Zealand, didn’t get going until later. Unlike the Reserve Bank of New Zealand, Rhee steered rates higher without crushing the economy.
There is undoubtedly a broader element to what’s playing out in Korea. “The past four years have delivered a remarkably synchronized swing in policy setting,” JPMorgan Chase & Co. economists wrote in a note on Wednesday. “Nearly every central bank went from cutting rates during the pandemic to rapid hikes in 2022. Over the coming six months, we now expect nearly all central banks to be cutting again on a slow path back toward neutral.”
What happened to the boom that artificial intelligence was supposed to usher in? Korea should still prosper from AI, even if some of the market hype has ebbed. The country is attractive in an era where investment is likely to be subject to strategic considerations; Korea is a US ally. A year ago, recession was predicted; the prospective slump hasn’t transpired — yet. The government recently upgraded its growth forecast for this year to 2.6% from 2.2%. That’s a hefty increase, given official estimates tend to be pretty conservative.
The coming rate cuts look like an adjustment rather than a salvage mission. It will be welcome, nonetheless. Rhee can still be restrictive and exhale — lente — at the same time.
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