Bank of Korea sticks with stance after holding rates

The Bank of Korea (BOK) held its policy rate steady for a fourth-straight meeting and pledged to retain a restrictive policy stance for a considerable time as it seeks to put a lid on consumer inflation.
The central bank kept its seven-day repurchase rate at 3.5% as predicted by all 15 economists surveyed by Bloomberg News. The BOK pledged in its statement to keep a restrictive policy stance for a “considerable time with an emphasis on ensuring price stability.”
The BOK’s holding pattern of recent months reflects its need to rein in price growth without putting too much pressure on a sputtering economy or exacerbating credit strains. The central bank said that while inflation has recently slowed, it’s expected to pick up again “to around the 3% level.”
Authorities also need to keep an eye on the gap between South Korean and US interest rates. The rate differential is currently the widest on record.
The gap has stirred market concerns over capital outflows and weighed on the won, although the Korean currency has pared losses since hitting a year-to-date low in early May.
The won and bond yields were largely unchanged from levels immediately before the decision.
Governor Rhee Chang-yong will hold a press briefing in Seoul, where he is expected to offer details on the monetary policy board’s discussion and the BOK’s version of the “dot plot” showing if board members still see scope for potential hikes in the months ahead.
After the BOK held policy steady in May, Rhee said the decision was unanimous, with six of seven board members open to the possibility of eventually lifting the terminal rate to 3.75%.
“The rate hold was expected because inflation has eased quite a lot and concerns over financial imbalances have risen,” said Woo Hye-young, fixed-analyst analyst at Ebest Investment & Securities Co. But the central bank is likely to retain its hawkish bias because “if Rhee gives the slightest impression that rate hikes are over, that will reduce the scope for the BOK to respond to any potential Fed hikes going forward,” she said.
The South Korean economy is facing an awkward combination of slowing economic activity and lingering strength in the deeper price trend despite a slowing of headline inflation. On the trade front, lingering uncertainties remain over the timing of a rebound in the chip sector even after some improvement in June.