Bank of Korea Governor Rhee Chang-yong refused to rule out the possibility of a further interest rate hike after an earlier decision to push up borrowing costs appeared to be the final act of an 18-month tightening cycle.
(Bloomberg) — Bank of Korea Governor Rhee Chang-yong refused to rule out the possibility of a further interest rate hike after an earlier decision to push up borrowing costs appeared to be the final act of an 18-month tightening cycle.
While flagging the likelihood that the economy shrank last quarter amid a global slowdown and elevated interest rates, Rhee pointed out that three board members still saw potential for another hike.
“I don’t think it’s right to interpret from this decision that the rate will be frozen,” said Rhee, leaving the door open to a further nudging up of rates despite expectations that the central bank will stop tightening policy as economic concerns come to the fore.
The BOK lifted its seven-day repurchase rate by a quarter-percentage point to 3.5%, a decision expected by 11 of 16 economists surveyed by Bloomberg. The remaining five had forecast no change.
Rhee said that two members had voted against the decision, an outcome that would typically point to a pause at the next meeting.
The board said in its statement that it would take account of the pace of inflation and economic downside and financial stability risks in deciding whether to raise rates further.
The yield on the nation’s three-year bond extended its fall to 3.37%, while the won pared some of its earlier gains. The moves suggest investors largely see the rate cycle as done for now.
Still, Rhee’s comments show he is keen to keep his options open. The BOK is trying to control inflation while also engineering a soft landing for the economy as the outlook turns increasingly uncertain.
“The fact that the board is divided by 3 on 3 at least signals that a back-to-back rate hike won’t happen,” said Kang Seungwon, fixed income strategist at NH Investment & Securities Co.
“With fourth quarter growth likely to show a contraction, and weak exports to continue into January,” we see the tightening cycle as “practically over.”
Inflation remains more than double the central bank’s target, but has slowed from its peak, a trend seen globally as commodity prices stabilize and the impact of rate hikes crimps activity.
Exports have begun to fall, weighing on industrial production, and the housing market is weakening rapidly. Should a likely property market correction prove deeper than expected, that could threaten to spill over into credit markets still smarting from the default of a Legoland Korea developer last year.
Those predicting the BOK would hold today cited increasing concerns about the economy’s trajectory. A Bloomberg survey published this week showed that analysts expect the economy to have contracted last quarter.
Weakening consumption is supporting that view as the boost from relaxed Covid rules wears off and the impact of rate hikes feeds through the economy. The BOK executed two half-point rate hikes last year in an unprecedented move as it sought to keep pace with the Federal Reserve’s rapid tightening and stem the depreciation of the won.
A crowd-crush tragedy in October in Seoul has also dented consumer sentiment, government officials say. In addition, the jobless rate rose last month by more than economists forecast as employers recalibrate hiring plans in preparation for weaker demand.
“The door to a higher rate is still open given inflation remains elevated,” said Ahn Yea-ha, an analyst at Kiwoom Securities Co. “The economy also hasn’t deteriorated yet to a level where you need to stir up expectations for easier policy. Right now it’s important to grapple with inflation expectations.”
–With assistance from Tomoko Sato.
(Updates with comment from governor and analyst.)
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