Bank of Korea Governor Rhee Chang-yong signaled that policymakers could raise interest rates further to counter inflation after they stood pat on Thursday for the first time in a year.
(Bloomberg) — Bank of Korea Governor Rhee Chang-yong signaled that policymakers could raise interest rates further to counter inflation after they stood pat on Thursday for the first time in a year.
Rhee told reporters that five of the board’s six members were open to a peak rate of 3.75% after the central bank kept its seven-day repurchase rate at 3.5%. Only one saw the current level as optimal.
The won extended gains, rising 0.7% to 1,295.85, while the yield on the three-yea government bond erased most of its earlier losses to be at 3.66%.
“The biggest objective in our monetary policy is to watch how inflation moves and the foreign exchange rate is secondary,” Rhee said. “Unlike last year I am thinking there’s more room to calibrate the monetary policy while looking at our inflation path.”
Thursday’s decision to pause reflects concern about fallout from the BOK’s 18-months 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.”
While most economists had seen 3.5% as the terminal rate, the BOK has kept open the option of a further hike by stressing that it remains focused on taming inflation.
The board “sees that it is appropriate to judge whether the base rate needs to rise further,” it said in Thursday’s statement.
The central bank provided its latest economic and inflation forecasts after the decision, showing little change from November’s estimates. Economic growth for this year was nudged down to 1.6% from 1.7% and inflation to 3.5% from 3.6%.
Future moves by the Fed may also factor into BOK thinking in coming months. With inflation coming down more slowly than previously expected, speculation is growing that the Fed may again ramp up its pace of tightening.
The currency’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, removing a key source of pressure on the BOK to keep tightening.
–With assistance from Tomoko Sato, Whanwoong Choi and Hooyeon Kim.
(Updates with Rhee’s comments from press conference.)
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