Article content

(Bloomberg) — The Bank of Korea warned against overconfidence that inflation is stabilizing near its target after holding its benchmark interest rate steady as exports fuel economic activity and energy costs pick up due to geopolitical risks.

The central bank kept its seven-day repurchase rate at 3.5% Thursday in a decision that matched the expectations of all 19 economists surveyed by Bloomberg. The bank last raised the rate in January 2023 and has since kept it at that level, which it characterizes as restrictive.

Article content

Article content

The BOK also left its headline forecasts unchanged, including its view that inflation will average 2.6% this year, slightly above the consensus of economists, with economic growth of 2.1%. It lowered its projection for core inflation a whisker to 2.2%, an indication that the underlying price trend is continuing to soften.

“While it is forecast that domestic economic growth will continue its improving trend and that inflation will maintain its slowing trend, it is premature to be confident that inflation will converge on the target level,” the BOK said in a statement following the decision and the release of its updated projections.

The BOK’s continued holding pattern shows the board remains vigilant against a potential resurgence in inflation even as consumer-price growth has slowed to the targeted 2% range. Ongoing conflicts in the Middle East and Eastern Europe have led to renewed strength in global energy prices, keeping South Korean policymakers on their toes as the economy is heavily dependent on imported oil and food.

“We agree that it is too early to declare a victory over inflation,” Jeong Woo Park at Nomura Holdings Inc., said in a note before the decision. Park said disinflation will likely become more evident in coming months. 

Article content

Article content

Continuing growth in exports provides the BOK with another reason to refrain from easing its monetary settings. The board expects external demand to help the trade-reliant economy grow faster this year compared with last year. 

The yield on the nation’s policy-sensitive three-year government bond edged down two basis points following the the lower forecast of core inflation. The short-term benchmark yield had been as low as 3.15% at the end of December, suggesting traders are growing wary of an imminent rate cut.

The Korean won held onto earlier gains spurred by the dollar’s weakness and improvements in broad risk appetite. It traded 0.3% higher against the dollar at around 1,330.60.

“The biggest news from the statement was the cut in the core inflation forecast. That’s likely due to weak domestic consumption,” said Kwon Keejoong, fixed-income analyst at IBK Securities Co. Still, with prices still high, the BOK isn’t expected to cut at least until the second half of the year, Kwon added. He expects the central bank to deliver two rate cuts then.

Speculation over policy pivots this year by the Federal Reserve and European Central Bank has helped spawn the expectations that the BOK might follow suit, even as uncertainty abounds, particularly in the US.

Article content

What Bloomberg Economics Says…

“Growing uncertainty over the path of Federal Reserve policy gives the BOK another reason to keep its policy rate in a restrictive zone for now.”

— Hyosung Kwon, economist

To read the full report, click here

“The board is likely going to exercise patience when it comes to a rate cut,” said Moon Junghiu, an economist at KB Kookmin Bank. “With inflation inching down toward 2% at the end of this year, arguments for a cut may start to strengthen, but there’s still unease in reducing the rate ahead of other central banks in the US and Europe.”

Governor Rhee Chang-yong said last month he doesn’t foresee cutting interest rates in Korea for at least another half year. A newly added member of the board, Hwang Kunil, appeared to back that view when he expressed concern over higher-than-targeted inflation upon joining the board earlier this month.

Hwang also highlighted a series of factors weighing on the South Korean economy, including weakening growth potential. The economy grew at a slower pace last year than in 2022, partly under pressure from global interest rates raised by central banks.

Article content

Economists expect the seven-person monetary policy board to start reducing the policy rate in the third quarter, a Bloomberg survey indicates, and a key focus will be how Rhee characterizes the likely trajectory of policy when he holds a post-decision briefing shortly.

Rhee will also disclose if there were any dissenters to the latest decision at a press conference starting shortly after 11 a.m. in Seoul. Markets will be interested in knowing if any board members cited the potential need for a quarter-point hike or cut.

—With assistance from Hooyeon Kim.

(Adds economist comment, market reaction)

Article content