The Bank of Korea is widely expected to keep interest rates unchanged on Thursday as policymakers’ spotlight shifts to the headwinds to economic growth from a prolonged focus on inflation pressures.
(Bloomberg) — The Bank of Korea is widely expected to keep interest rates unchanged on Thursday as policymakers’ spotlight shifts to the headwinds to economic growth from a prolonged focus on inflation pressures.
All but one economist expects the central bank to hold its key rate at 3.5%, in what would be the first unchanged decision in a year. The outlier, Poon Panichpibool at Krung Thai Bank PCL, sees a quarter-point hike amid concerns a more hawkish Federal Reserve could spark renewed weakness in the won.
Two board members dissented from last month’s rate rise, arguing tight policy was already dragging on the economy. Their positions suggested the BOK would keep borrowing costs unchanged this time round.
“Concerns about growth by policymakers appear to outweigh worries over inflation and capital outflows,” Societe Generale economists led by Oh Suktae said in a research note. “A decision to hold the policy rates will effectively support our view that the rate-hike cycle had already ended in January.”
The BOK is increasingly concerned about an economic slowdown as a result of its 18-month tightening cycle to rein in inflation. An export slump, housing downturn and slowing consumption underline the struggles in the economy, which posted its first contraction in more than two years last quarter.
Following are some key points worth watching Thursday when the BOK announces its decision and Governor Rhee Chang-yong briefs reporters.
- How many board members still believe the BOK should keep the door open to a higher rate
- Rhee’s thoughts on the potential for the Fed to again pick up the pace of tightening
- Rhee’s comments on the won’s recent weakening against the dollar
- The housing-market correction and its impact on consumption
- How long the BOK expects the export slump to persist and its impact on economic growth
A BOK pause could herald the beginning of an extended rate freeze across the Asia-Pacific as central banks expect inflation to cool.
“For 90% of the region, inflation is on track to fall back into the respective central banks’ comfort zones,” Morgan Stanley said in a report, expecting most of Asia to be on hold by the end of the first quarter.
Policymakers are also worried about a global economic downturn that could sap demand for products manufactured in Asia, including semiconductors, cars and smartphones.
The BOK is expected to revise down its forecast for economic growth on Thursday, having acknowledged last month that an earlier projection might have been a bit too optimistic. Still, the bank said inflation this year would likely be in line with its previous estimate.
While price pressures have shown signs of easing, Korea is not out of the woods yet with inflation. Consumer-price growth ticked up again in January, climbing to 5.2% from a year earlier.
The BOK has said it will remain on a path of policy tightening as long as inflation hovers in the 5% range. Rhee warned last month that markets shouldn’t rush to call the end of the cycle.
Rhee revealed last month that three of the seven board members estimated that 3.5% would be the peak rate, while three others didn’t want to close the door on a further increase. Rhee didn’t disclose his view.
Economists surveyed by Bloomberg reckon the BOK reached its terminal rate last month and may even lower rates by a quarter point in the final three months of this year. Rhee has dismissed any talk of rate cuts as premature.
With US inflation proving sticky, a higher Fed rate is a potential trigger for Korea to tighten further. The BOK hiked by 50 basis points at two meetings last year to narrow a rate gap with the US and stem the won’s inflation-fueling depreciation.
Both the BOK and the Fed have an inflation target of 2%.
–With assistance from Tomoko Sato.
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