Bank of Korea Governor Rhee Chang-yong warned that the central bank’s war on inflation isn’t over despite signs of cooling prices, saying it remains uncertain whether the current policy is tight enough.
(Bloomberg) — Bank of Korea Governor Rhee Chang-yong warned that the central bank’s war on inflation isn’t over despite signs of cooling prices, saying it remains uncertain whether the current policy is tight enough.
“We’re in a restrictive area,” Rhee told Bloomberg TV’s Shery Ahn in Washington, referring to higher interest rates. “On the other hand, I do not want to give a message that this level is restrictive enough to automatically reduce inflation.”
While Korea’s consumer price gains have slid to 4.2% from last year’s peak of 6.3%, it remains double the BOK target of 2%. Factors including a planned OPEC+ production cut and the Federal Reserve’s policy may further aggravate price pressures, Rhee said.
Still, the BOK held its key interest rate for a second time in a row earlier this week, with the board’s unanimous decision signaling a possible end to its tightening cycle.
A growing number of analysts are betting that the BOK will start cutting rates later this year to spur growth as the economy weakens amid an export slump, property-market woes and cooling consumption.
It’s “still too premature to be certain” about the path of inflation, much less a potential easing, Rhee said. Rather, the decision to hold in recent months reflects the BOK’s willingness to assess the impact on prices from its 18-month tightening cycle, he said.
The BOK’s decision to leave rates unchanged adds to evidence that central banks globally are reaching an inflection point in their fight against inflation. Policymakers are increasingly wary of aggravating the economy with higher borrowing costs, which can slow demand and cool prices but also risk triggering a recession.
In South Korea, falling exports have weighed on production and threaten to further erode investor confidence in the economy’s growth prospects. Consumption has also weakened as higher prices bite into spending. At the same time, default risks are growing among developers as the housing market slumps because of higher borrowing costs.
At a press conference following the rate decision, Rhee doused expectations for an early return to lower rates, saying it was inappropriate to talk about a rate cut before getting a clear signal that inflation was cooling to the 2% target.
Only one board member sees the current interest rate setting of 3.5% as a favorable terminal rate, Rhee said Tuesday. Five board members want to keep the door open to a higher rate, he said, without disclosing his own view.
Any suggestion from the central bank about a possible rate cut risks further weakening the won. The currency is Asia’s worst performer so far this year, a decline that has added to strains on an economy that relies heavily on imports for food and energy.
The BOK has been monitoring the impact from the collapse of Silicon Valley Bank and Credit Suisse, though policymakers see limited impact on Korea.
Rhee is also scheduled to speak Friday on a panel in Washington during the International Monetary Fund’s spring meetings.
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