The Bank of Korea is widely expected to stand pat on Tuesday as inflation slows and financial-market jitters remain, with growing views that its current tightening cycle has little room left to run.
(Bloomberg) — The Bank of Korea is widely expected to stand pat on Tuesday as inflation slows and financial-market jitters remain, with growing views that its current tightening cycle has little room left to run.
A Bloomberg survey found that 15 out of 16 economists expect the South Korean central bank to keep its benchmark interest rate at 3.5%, which would mark the first time the board holds for two meetings in a row since the hike cycle began in August 2021. Only one analyst forecast a hike.
Swap markets are pricing in at least one rate cut within the next 12 months, and at least two in the next two years. The yield on South Korea’s 10-year bond has fallen about 55 basis points after reaching 3.84% early March. The three-year rate has declined even more during the period to 3.25%.
Korea’s economy faces growing headwinds after the banking-sector turmoil in the US fueled concerns about a global economic recession and slowdown global trade. With an economy heavily dependent on exports, Korea is struggling to revive growth momentum as demand for semiconductors and other products wanes.
The local economy is under its own share of financial pressure as the property market slumps and default risks persist among developers after 18-months of tightening by the BOK to combat inflation. Household debt also remains elevated with the majority of borrowers on floating rates.
Easing price pressures in recent months have offered the BOK some breathing room to assess the impact of its hikes and plot the next course of action. That doesn’t mean the fight against inflation is over as prices excluding oil and agricultural products remain elevated. OPEC+ also plans a production cut and China’s economic reopening is also seen adding to inflationary risks.
“The problem is that core inflation isn’t falling much across the world,” said Lim Dong-min, a Kyobo Securities researcher. “The BOK is still likely to keep the rate frozen because inflation has softened just enough for it to do so.”
Given that a rate hold this week is already priced in, bond traders will focus more on global drivers such as the US inflation data and the Fed’s May decision for signs of a potential rate cut, said Ahn Jae-kyun, fixed-income analyst at Shinhan Corp.
The BOK may hold but will still keep the door open to another hike, according to Goldman Sachs. Governor Rhee Chang-yong, since taking office last year, has introduced the practice of revealing how many members prefer which terminal rate. He said in February that the majority remain open to more tightening.
“We continue to see a meaningful risk of additional rate hike to 3.75%,” Goldman Sachs said in a note. It also expected the start of an easing cycle in the final three months of 2023.
Citigroup Inc. sees an earlier rate cut by the BOK, expecting an easing cycle to begin in August and more members on Tuesday to support the current 3.5% as the peak of the hike cycle. Bloomberg’s own survey shows economists see a hold until the end of this year and a gradual easing to start toward 2.5% in 2024.
Adding to risks for the Korean economy is a growing likelihood of local developers collapsing in a country where construction accounts for a sizable share of the economy. In an interview with Bloomberg, Lee Bokhyun, governor of the Financial Supervisory Service, said some of them may fail and that policymakers were trying to ensure it would happen only gradually.
Korea’s credit market was rattled last fall when a local developer of Legoland Korea missed a debt payment. It has since met its obligations, but jitters remain as construction companies backed by financial firms struggle to sell housing amid elevated borrowing costs.
“When you look at these specific sectors, utilities, construction companies, etc., that’s where leverage ratios are still very high,” said Anushka Shah, vice president and senior credit officer at Moody’s Investors Service. “That’s something where you could see risk arising that would then have spillover effects from tighter funding conditions more broadly for the system.”
The BOK’s April meeting is the last for two of the seven board members. While it’s still unclear whether their replacements — Seoul National University Economics Professor Chang Yongsung and former finance ministry official Park Chunsup — are hawkish or dovish in their views on monetary policy, the change adds to the complexity in forecasting BOK steps at a time of elevated inflation and slowing growth.
–With assistance from Tomoko Sato and Hooyeon Kim.
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