BOK keeps door open to further hike after rate pause

Bloomberg

Bank of Korea (BOK) Governor Rhee Chang-yong sought to keep the door open to resuming policy tightening to counter inflation after the board kept interest rates unchanged on Thursday for the first time in a year.
Rhee told reporters that five of the six board members he polled were open to borrowing costs reaching a peak of 3.75% after holding the seven-day repurchase rate at 3.5%. That was an increase from three board members in January. The board comprises seven members including the governor.
“I hope the hold this time isn’t going to be seen as meaning the rate-hike stance is over,” Rhee said. One member dissented from the decision, calling for a quarter-point rate increase, he added.
The won extended gains, rising 0.7% to 1,295.85 in response to the more hawkish tone, while the yield on three-year government bonds fluctuated.
“Despite the rate hold, markets reacted much more sensitively to the fact that there were five board members looking at a potentially higher BOK terminal rate,” said So Jaeyong, an economist at Shinhan Bank.
The central bank said in a statement that Korean inflation is likely to fall at a slower pace than other major economies, given the potential for a rise in utility costs, which contributed to faster consumer price growth last month.
Future moves by the Federal Reserve are also likely to factor into BOK thinking in coming months. With US inflation coming down slower than expected, speculation is growing that the Fed may again ramp up its pace of tightening.
Such a development could rekindle the won’s inflation-fuelling depreciation.
“The biggest objective in our monetary policy is to watch how inflation moves and the foreign exchange rate is secondary,” Rhee said. “Now is the time to check and discuss how the path we forecast unfolds.”
The central bank provided updated economic and inflation forecasts after the decision, showing little change from November’s estimates. Economic growth this year was nudged down to 1.6% from 1.7% and inflation to 3.5% from 3.6%.
The decision to pause reflects concern about fallout from the BOK’s 18-month tightening cycle, with the economy contracting in the final three months of 2022 and house prices declining.
Consumption has been slowing in the wake of a crowd-crush in Seoul last fall and exports have begun to drop, with a record trade deficit posted in January. A plunge in global semiconductor demand has also led manufacturers to scale back production.
“For now the BOK is likely to keep the rate frozen until a possible cut in the fourth quarter,” said Ahn Yea-ha, analyst at Kiwoom Securities Co. “That’s assuming there’s no serious volatility in the exchange rate and the Fed doesn’t go higher than previously anticipated.”
The won’s weakening was cited as an important driver of the BOK’s decision to execute larger-than-usual rate hikes last fall as the depreciation pushed up the cost of food and energy imports. So far this year the won has been among the strongest Asian currencies.
“Unlike last year I am thinking there’s more room to calibrate the monetary policy while looking at our inflation path,” Rhee said, recalling the BOK trying to keep pace with the Fed last year on currency concerns.
South Korea was in the vanguard when it began tightening policy in August 2021 and appeared to be an early mover in pausing with this latest decision, especially as most economists surveyed by Bloomberg saw 3.5% as the peak rate.
Yet the governor revealed that only one board member favored ending the tightening cycle at 3.5% at Thursday’s meeting. That’s down from three in January.
The BOK was “more hawkish than expected,” said economist Park Jeong-woo at Nomura Holdings Inc. “The BOK’s judgment that the economic slowdown in the first half would be temporary played a large role
in its decision, amid the recently elevated expectation for a global economic soft-landing.”