(Bloomberg) -- The Bank of Korea softened the tone of its hawkish holding pattern on interest rates while trying to tame speculation over an early policy pivot with warnings about stickier-than-expected inflation.

South Korea’s central bank kept its seven-day repurchase rate at 3.5% in its last decision of the year, a move forecast by all 22 economists surveyed by Bloomberg. The policy rate has stayed at its 15-year high since authorities last hiked in January.

While the decision was unanimous, Governor Rhee Chang-yong said in a press conference that the number of board members seeing a possible need to further raise rates fell to four from six last month. That softening of the policy board’s hawkish hold suggests the possibility of an eventual change in policy direction is edging closer.

“On the surface Rhee was a hawk,” said Yoon Yeo-sam, an analyst at Meritz Securities in Seoul. “But he might also have been paving the way for an eventual pivot by taking a step toward a more neutral and balanced stance.”

The South Korean won moved within a narrow range throughout Rhee’s press conference, largely in line with moves in the US dollar. The nation’s benchmark bond yields hovered near four-month lows.

While inflation has outpaced forecasts in recent months, the latest decision underscores the view that the BOK is likely done with rate hikes. Economists and market players see its next move as downward as the bank looks to secure a soft landing for the economy after its battle with hot prices.

Growing expectations that the Federal Reserve will ease policy next year also offers more leeway for the BOK to consider a rate cut in 2024 once it has seen more evidence that inflation is under control. Already the outlook for US rates has helped strengthen the won against the dollar and lower bond yields.

“I’m aware of changes in US, UK and other markets toward views that a rate-cutting cycle may begin soon,” Rhee said. “But I think markets are definitely getting ahead of themselves.”

For now, the BOK’s focus remains on prices. Following the decision, the bank raised its inflation forecast for next year to 2.6% from 2.4% and also nudged up its projection for this year to 3.6% in an indication that it will take longer to cool inflation than previously thought.

Rhee said inflation will likely slow in the next two or three months before converging on 2% toward the end of next year or even early 2025.

“Rhee seemed to rule out the possibility of any near-term rate cuts,” said Shin Earl, head of fixed-income strategy at Sangsangin Investment. “Markets are indeed getting ahead of global central banks, like Rhee said.”

Shin expects the BOK to deliver its first rate cut as early as in the third quarter of next year.

The central bank also edged away from a commitment to keep rates restrictive for a “considerable time” in its statement. Instead it said rates would remain restrictive for a sufficiently long period of time to ensure inflation converged on its goal.

Rhee declined to say specifically how many months that indicates.

“While the BOK has raised its CPI forecasts for this year and the next, the larger inflation trendline continues to show a downward path,” said Paik Yoon-min, fixed-income analyst at Kyobo Securities.

That means the focus will eventually turn to growth next year, increasing the possibility for the central bank to start cutting rates as early as in the second quarter of 2024, Paik said.

Rhee indicated that one member had changed position on the option of a rate cut if the Israel-Hamas conflict affects the economy. That member no longer sees that possibility, Rhee said.

Still, there are signs that economic momentum is starting to decelerate even as exports recover. Consumer confidence has fallen for four months in a row, dipping below a key threshold to indicate pessimism now prevails over optimism. Business confidence also remains shaky after dropping from this year’s high in June.

The central bank fractionally lowered its growth forecast for next year to 2.1%, while keeping its projection for this year at 1.4%. 

The downgraded growth forecast opens room for it to respond to economic uncertainties flexibly, according to Cho Yong-gu, an analyst at Shinyoung Securities.

“A rate cut in the second half still remains a sufficient possibility,” he said.

(Updates with comments from economists)

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