(Bloomberg) -- Bank of Korea Governor Rhee Chang-yong kept alive speculation over a possible policy easing later this year by highlighting a steady outlook for inflation even as economic growth picks up.

After the bank’s policy board voted unanimously to hold the benchmark interest rate at 3.5% for an 11th consecutive time, South Korea’s central bank sharply raised its prediction for economic growth while keeping its consumer-price outlook steady. The moves indicated the bank doesn’t think stronger growth would lead to hotter inflation.

“We thought the big change in the growth forecast would have a huge impact on inflation, but it wasn’t big enough to change the inflation outlook,” Rhee said in a news conference Thursday. “That’s big news for us.”

The BOK raised its 2024 growth forecast to 2.5% from 2.1%, matching an earlier Bloomberg survey of economists. That came after first-quarter gross domestic product rose by 1.3%, soundly beating a 0.6% forecast by private economists. The BOK stuck with its previous forecast for consumer price index growth of 2.6% this year.

“Our economists have expected a more hawkish BOK given the upbeat first quarter GDP, and looked for a revision in its growth forecast to 2.5-2.6% and consider raising its inflation forecast,” said Lemon Zhang, an FX strategist at Barclays Bank in Singapore. “The new GDP forecasts with unchanged CPI forecasts turned more dovish than our expectations.”

The yield on South Korea’s policy-sensitive, three-year benchmark bond was steady at 3.4% after slipping two basis points earlier. The nation’s 10-year yield also consolidated at 3.47%.

The equity benchmark Kospi erased its earlier loss to edge higher after Rhee said the potential for an interest rate hike was limited, which helped fuel foreign inflows into Korean stocks. The gauge’s gain was also helped by South Korea’s announcement of a support package for chips.

Semiconductor sales have been part and parcel to South Korea’s export rally this year. The trade-reliant nation is home to two of the world’s biggest memory-chip makers, Samsung Electronics Co. and SK Hynix Inc., who have seen their shares pick up on demand from artificial intelligence developers and data-center operators.

Rhee said most gains in exports would have little influence on price pressure at home and that inflation is seen as staying in a slowing trend. Still, the bank needs more time to be confident that inflation would converge on the target of 2%.

“Uncertainties over the timing of a rate cut have grown,” he said, demonstrating that the tilt is toward an eventual easing. “If there is confidence that inflation stabilizes, the task of normalizing the rate level would need to be started.”

The news conference took a “dovish” turn after a relatively neutral policy statement, said Wee Khoon Chong, a senior market strategist for Asia Pacific at BNY Mellon in Hong Kong. “The bias for BOK remains to cut in the near-term.”

The weak won bears out the case for keeping the rate restrictive for now as the local currency is among those in Asia that have slumped the most against the dollar this year. The Federal Reserve has signaled caution about the outlook for any rate cuts this year as US economic data have been robust, supporting the dollar. The won’s weakness may kindle more inflation in coming months, as South Korea relies heavily on imports of fuel among other products.

“Stronger-than-expected Korean growth and US inflation readings likely justify the BOK keeping rates on hold for longer,” Pantheon Economics said in a report before the decision.

What Bloomberg Economics Says...

“We also think the BOK will wait for the Federal Reserve to start cutting rates before it does. Korea’s central bank doesn’t want to risk an early move that could spur further declines in the won — fanning financial stability risks and stoking inflation.”

— Hyosung Kwon, economist

Click here to read the full report

In the property sector, the growth in mortgage loans picked up by 5.8% from a year earlier in the first quarter, underscoring the difficulties of reining in household debt even as the central bank keeps borrowing costs high.

Still, credit risks continue to overshadow the South Korean real estate sector. Finance related to property projects amounted to 230 trillion won ($170 billion) as of the end of 2023, equal to 2.8% of total financial-sector assets. Debt structuring is likely to pick up as 2024 progresses, according to Bloomberg Economics.

The performance of the property sector may influence private spending, which has been resilient so far this year. Separately, exports will be affected by how artificial intelligence and server demand plays out in major economies such as the US, as technology accounts for a large portion of South Korea’s products.

--With assistance from Youkyung Lee, Shinhye Kang and Seyoon Kim.

(Updates with comment from Governor Rhee)

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