Bank of Korea to keep policy restrictive after standing pat

BLOOMBERG

The Bank of Korea (BOK) kept its benchmark interest rate unchanged and said it intends to keep policy restrictive to combat inflation even with the economy set to slow more than previously expected this year.
The central bank held its seven-day repurchase rate at 3.5%, as forecast by economists. Unlike in February, the latest decision was unanimous, an outcome that points to growing concern among board members over the risks for the economy.
Still, Governor Rhee Chang-yong ruled out the possibility of a rate cut for now despite expectations among market players for a move in that direction later this year.
“Many board members are thinking that market expectations may be excessive,” Rhee said at a briefing after the decision. “The majority opinion among the board is that the financial sector has excessively priced in expectations for monetary policy abroad.”
The South Korean won initially rose with the nation’s bond yields after Rhee drew a line against the possibility of rate cuts this year. The yield on the three-year government bond climbed four basis points to 3.24% mid-afternoon in Seoul.
“Markets seem to be normalising now” after Rhee appeared to “scold” players for focusing too much on the prospects for a rate cut lately, said Shin Earl, head of fixed-income strategy at Sangsangin Investment & Securities Co Ltd.
South Korea faces an awkward combination of slowing economic activity and continued high consumer price growth. That will likely keep the central bank standing pat for the time being as it monitors the situation, with the view that prices will probably cool sufficiently to avoid any more rate hikes.
While Rhee again indicated that five members of the board want to leave open the possibility of raising rates, the BOK is widely seen as having reached the end of a tightening cycle that began in August 2021.
“The central bank is likely to hold the policy rate at 3.5% for the rest of the year,” said Eric Chiang, economist at Moody’s Analytics, after the briefing.
Reinforcing that view is an export slump that’s set to weigh on Korea’s economic growth. The country’s gross domestic product shrank in the final quarter of 2022 and likely struggled in the first three months of this year.
GDP growth this year is likely to be slightly below February forecasts of 1.6%, the central bank said. The BOK has flagged the impact of financial turmoil.
“New uncertainties have emerged since the previous policy decision,” Rhee said, citing the banking jitters sparked by the failures at Silicon Valley Bank (SVB) and Credit Suisse.
“SVB has thrown cold water on expectations for economic growth in not only the US and Europe but also in Korea,” Rhee said.
Core inflation, which excludes oil and agriculture prices, remains near the highest level since 2008, suggesting underlying price pressures are still strong. The won is also the worst performing Asian currency this year, adding to reasons for the central bank to guard against any suggestions of an end to its tightening cycle.
The country’s trade deficit has widened amid the decline in exports, weighing on industrial production. Korean exporters also face a potential squeeze from geopolitical tensions between the US and China, their two biggest buyers.
The housing market in Korea is weakening, a looming threat for credit markets still smarting from the default of a Legoland Korea developer last fall.
With domestic growth still weak, inflation easing, and the risks of a very hawkish US Fed diminishing, the pressure on the BOK to hike rates is continuing to fade, according to a researcher.