May 24, 2023
Bank of Korea Holds Rate, Lowers Growth View as Risks Mount
(Bloomberg) -- The Bank of Korea left interest rates unchanged for a third straight meeting while reinforcing its message that persistent inflation means an additional hike is still possible.
The central bank kept its seven-day repurchase rate at 3.5% on Thursday as predicted by all 17 economists surveyed by Bloomberg News. Six of seven board members are open to the terminal rate reaching 3.75%. And while officials see inflation rising at a slower pace than their previous forecasts, their outlook still tops market expectations and core prices are seen hotter for 2023.
The central bank’s pause, while still leaving the door open to one more hike, shows officials are putting the fight against sticky prices ahead of supporting an economy under pressure amid a global slowdown. Prior to the BOK’s announcement, investors and many analysts were betting on rate cuts in Korea later this year, as risks to economic growth build.
The decision also comes amid renewed doubts over whether the Federal Reserve will hold its policy rate at its next meeting as shown by Fed minutes released overnight and recent comments by policymakers. Additional rate hikes in the US could put further pressure on a weak won. A move by the Reserve Bank of New Zealand on Wednesday to indicate rates had reached their peak prompted a slump in that country’s currency.
Markets “shouldn’t think the BOK is absolutely over with rate hikes,” Governor Rhee Chang-yong said during a press conference following the release of the statement. “Members will monitor the situation, especially inflation, along with other central bank decisions and their impact on Korea” to determine policy, he said.
The yield on the government’s policy-sensitive three-year note extended gains after Rhee’s comments on inflation pressures lingering, rising 12 basis points to 3.49%.
Central bank officials maintained their projection for a 3.5% increase in consumer prices this year before easing to 2.4% in 2024 from a prior forecast of 2.6%. But they see core inflation lingering for longer than previously thought, boosting their forecast for this year to 3.3% from 3%.
The bank also revised down annual growth expectations for 2023 to 1.4% — a move that was widely expected by analysts — and to 2.3% in 2024. Rhee said that exports of chips — a major driver of economic growth for the country — would recover after bottoming out in the fourth quarter as China winds down its stockpile of inventory and demand recovers in the world’s second-biggest economy.
The BOK likely cut its growth outlook because “any positive spillover effect from China’s recovery has been small, and consumption has remained sluggish especially in terms of investment,” said Woo Hye-young, fixed-income analyst at Ebest Investment & Securities Co. Analysts will closely watch the core inflation figure to gauge future policy moves, she said.
The growth picture has grown increasingly murky in South Korea, primarily due to weak global demand for its goods and services. Exports have fallen sharply since late last year and there are few signs of a rebound.
There are also several internal risks to the outlook, including consumer spending amid a utility rate hike and higher living costs. The housing market has also slowed as higher interest rates crimp borrowing, though Rhee said he expects a soft landing rather than a major correction in prices.
Despite mounting growth headwinds, the Bank of Korea made clear Thursday that their top priority remains inflation.
“We expect the policy messaging will continue to push back against a quick easing pivot,” said Krystal Tan, an economist at Australia & New Zealand Banking Group. She expects the first rate cut in early 2024, barring any major shift in rhetoric.
(Updates with Rhee comments, market context. An earlier version was amended to clarify year of raised core inflation projection.)
©2023 Bloomberg L.P.