The Bank of Korea (BOK) yesterday 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 percent, 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.
Photo: Bloomberg
“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.”
South Korea faces an awkward combination of slowing economic activity and continued high consumer price growth. That would likely keep the central bank standing pat as it monitors the situation, with the view that prices would 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 percent for the rest of the year,” Moody’s Analytics economist Eric Chiang said after the briefing.
Reinforcing that view is an export slump that is set to weigh on South Korea’s economic growth. The country’s GDP shrank in the final quarter of last year 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 percent, the central bank said.
The BOK has also flagged the effects of recent 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 Group AG.
“SVB has thrown cold water on expectations for economic growth in not only the US and Europe but also in Korea,” Rhee said.
Last week, the central bank pointed to greater volatility in prices ahead after OPEC+ announced an oil production cut, even as domestic inflation slowed.
With domestic growth still weak, inflation easing, and the risks of a hawkish US Federal Reserve diminishing, the pressure on the BOK to hike rates is continuing to fade, said Khoon Goh (吳昆), head of Asia research at Australia and New Zealand Banking Group in Singapore.
“At the same time, with inflation expectations still elevated and uncertainties surrounding the pace of the inflation slowdown high, the central bank is likely to continue pushing back against expectations for a quick easing pivot,” he said.
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