The Bank of Korea is set to hold its policy rate for a third straight meeting Thursday, as officials cautiously navigate persistent inflation and a slowing economic growth picture.
(Bloomberg) — The Bank of Korea is set to hold its policy rate for a third straight meeting Thursday, as officials cautiously navigate persistent inflation and a slowing economic growth picture.
All 17 economists surveyed by Bloomberg News expect the central bank to hold its seven-day repurchase rate at 3.5%, where it’s been since January. The BOK will also update its forecasts for key economic indicators including growth and inflation.
Policymakers have already said in the weeks leading up to the meeting that 2023 economic growth may be slower than expected amid weak global demand for Korean exports, the largest driver of the economy.
“The anticipated hold decision is likely to be unanimous,” said Moon Hongcheol, a fixed-income and FX strategist at DB Financial Investment Co. “Exports aren’t looking good, meaning policymakers would want to be cautious” over any further rate hikes, Moon said.
The BOK is among central banks struggling to address the lingering risks of inflation amid a souring economic outlook that is only likely to worsen with further policy tightening. The Federal Reserve raised interest rates a quarter point at its meeting earlier this month, while signaling that it’s likely to hold in June.
With a BOK hold for May largely baked in, analysts will focus on the bank’s outlook for the economy and monetary policy, paying particular attention to its version of the Fed’s “dot plot” of interest rate projections. Two new board members — Park Chunsup and Chang Yongsung — will participate for the first time and their policy leanings remain unclear.
In South Korea, growth in consumer prices has eased over the past three months to the slowest pace since early 2022, but core inflation remains a concern. The recent cooling of prices excluding agriculture products and oil has been more limited than the deceleration of overall price growth, signaling that pressures remain.
At the same time, the economic outlook is looking gloomier. Shipments have declined on an annual basis each month since October, and are set to fall again in May, based on data for the month so far. Global demand for tech products has faltered as China’s reopening failed to materialize in a buying surge that offered respite to South Korea’s chip sector.
While analysts surveyed by Bloomberg expect economic growth to continue to pick up in the second quarter following the contraction in the last three months of 2022, waning exports remain a key risk. In addition, consumer spending has remained weak in recent months as consumers digest a utility rate hike and higher living costs.
The polled analysts see a much smaller economic expansion of 1.2% this year compared with the BOK’s current forecast of 1.6%. The strengthening headwinds have boosted expectations among economists that the bank will cut rates as early as this year to support growth.
Swaps markets are currently pricing in at least one BOK rate cut in the next 12 months. The yield on the nation’s policy-sensitive three-year benchmark bonds has fallen more than 50 basis points since early March to settle below the BOK’s 3.5% policy rate, indicating that investors expect a rate cut.
BOK Governor Rhee Chang-yong has so far characterized any talk of a rate cut as premature, citing inflation that remains above the central bank’s 2% target. The BOK may reiterate that position in May, according to Citigroup Inc. economist Kim Jin-wook.
“BOK is highly likely to limit any discussion for rate cutting cycle in the first half of this year by highlighting stickiness in core inflation, volatility in the won and uncertainty in Fed’s monetary policy,” he wrote in a note.
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