Bank of Korea Governor Rhee Chang-yong sought to keep his policy options open after delivering what markets interpreted as the final interest-rate increase of the central bank’s 18-month tightening cycle.
(Bloomberg) — Bank of Korea Governor Rhee Chang-yong sought to keep his policy options open after delivering what markets interpreted as the final interest-rate increase of the central bank’s 18-month tightening cycle.
Having raised the seven-day repurchase rate by a quarter-percentage point to 3.5%, Rhee pointed out that three board members saw the possibility of moving higher — one more than at the previous meeting. Three others maintained the current rate should represent the policy peak.
Two board members voted against Friday’s hike, an outcome that typically points to a pause at the next meeting.
“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.”
The yield on the nation’s three-year bond extended its fall to as low as 3.34%, while the won pared some of its earlier gains. The moves suggest investors largely see the rate cycle as done for now.
The BOK said in its decision statement that it would take account of the pace of inflation and downside risks to the economy and financial stability in deciding whether to tighten further.
At his press conference, Rhee refused to to rule out the possibility of a further hike while flagging the likelihood that the economy shrank last quarter amid a global slowdown and higher borrowing costs.
“I don’t think it’s right to interpret from this decision that the rate will be frozen,” he said, pushing back against expectations the central bank is done as concerns about the economy come to the fore.
The BOK is trying to control inflation while also engineering a soft landing for the economy as the outlook turns increasingly uncertain.
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.
The five of 16 economists who predicted the BOK would keep rates unchanged 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 market is probably right,” said Moon Hongcheol, a strategist at DB Financial Investment. “With inflation finally stabilizing, the central bank wouldn’t want to stimulate markets in any way by signaling a shift to accommodative policy too soon.”
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