The Bank of Korea stuck resolutely to its hawkish stance of holding interest rates while warning of the possibility of more hikes to come as it battles to rein in consumer inflation without derailing the economy.
(Bloomberg) — The Bank of Korea stuck resolutely to its hawkish stance of holding interest rates while warning of the possibility of more hikes to come as it battles to rein in consumer inflation without derailing the economy.
The central bank kept its seven-day repurchase rate at 3.5% on Thursday for the fourth-straight meeting as predicted by all 15 economists surveyed by Bloomberg News. The BOK pledged in its statement to keep a restrictive policy stance for a “considerable time with an emphasis on ensuring price stability.”
In his post-meeting press conference, Governor Rhee Chang-yong said the decision was unanimous, with all six members on his board remaining open to the possibility of ultimately lifting the rate to 3.75%, as was the case in May. The won continued to tick up against the dollar following weakness in US inflation figures overnight, while bond yields fell as market players took Rhee’s reference to further rate hikes with a pinch of salt.
The BOK’s holding pattern of recent months reflects its need to rein in price growth without putting too much pressure on a sputtering economy or exacerbating credit strains.
The BOK was among the first central banks globally to pause interest rate hikes when it stood pat in February and tends to be an early mover in rate cycles, offering clues to how the global trend may proceed.
“The BOK was faster than most other countries in terms of hiking rates, and inflation has come under control faster as a result, providing the right circumstance for slowing down the pace of its policy tightening,” said Park Chong Hoon, an economist at Standard Chartered Bank Korea. “There is a chance the BOK will start cutting ahead of most other countries,” once the US has signaled the end of its rate hikes, Park said.
For now there are no signs of cracks in the board’s resolute stance as Rhee warned that the inflation battle was still not over.
Headline inflation eased for a fifth month in June, but gains in the core price gauge have proven stickier than expected. Rhee said that while inflation will slow in July, it’s expected to accelerate again to the 3% level and stay there through year-end.
The central bank kept its hawkish bias because a softening of that stance might “reduce the scope for the BOK to respond to any potential Fed hikes going forward,” said Woo Hye-young, fixed-analyst analyst at Ebest Investment & Securities Co.
The gap between South Korean and US interest rates stands at the widest on record, a factor that can weigh on the currency and fuel capital outflows. The slowdown in US consumer inflation in June has taken some of the pressure off the Federal Reserve, but it’s still expected to raise interest rates one more time later this month.
For the time being, pressure on the won has eased since May. Rhee said the rate differential was just one among many factors influencing the currency.
What Bloomberg Economics Says…
“A tight jobs market and recent increases in household borrowing in the face of higher rates add to the case for the BOK to keep a hawkish stance for the time being.”
– Hyosung Kwon, economist
For the full report, click here
Rhee said a number of officials expressed concern about rising household debt levels.
“The household debt-to-GDP ratio has always been on the rise for the past 70 years except for times of crisis,” Rhee said. If the ratio continues to rise, “it will become a big source of concern, and thus it’s clear we can’t let it keep growing.”
Bank loans to households rose to a record-high at the end of June, adding to concerns over financial imbalances. Rhee said policy rates alone can’t resolve challenges pertaining to household debt.
Rising default rates at MG Community Credit Cooperatives and uncertainties linked to the nation’s housing market are also a concern. Rhee said issues related to credit cooperatives have moderated in recent days. He attributed a correction in house prices to a history of high leverage.
–With assistance from Heejin Kim.
(Adds Rhee’s comments from press briefing)
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