(Bloomberg) -- Bank of Korea Governor Rhee Chang-yong continued to push back against speculation of an early interest rate cut even as one of his board members flagged the possibility of easing policy in the next three months following the central bank’s stand-pat decision.

While an interest rate cut sometime in 2024 looks largely inevitable with economists flagging a first move in the third quarter, Rhee had to reinforce his opposition to early action after disclosing that one of his colleagues is now open to a near-term rate cut. The board member’s view prompted a fall in government bond yields.

“The direction of rate policy will become clear only when we become confident inflation is going to trend as we projected,” Rhee said. “If inflation slows as expected, our policy room will grow. But if it doesn’t, we should think of other methods, too.”

The governor added that a rate cut in the first half of the year is unlikely.

Still, the board member’s openness to an early rate cut sparked a seven-basis-point slide in three year government debt yields to around 3.36%. The won pared earlier gains to trade 0.2% higher against the dollar at 1,331.65 following the remarks.

The member’s diverging view shows that unity in the BOK’s vigilance against a potential resurgence in inflation isn’t as solid as it was in January. That complicates the messaging task for Rhee, who again found himself trying to tamp down speculation of an early move fueled by expectations that the Federal Reserve will lower US rates in the summer.

“We are at the starting point of a path toward minority dissent or even a rate cut depending on the pace of consumption slowdown going forward,” said Ahn Jae-kyun, an analyst at Shinhan Securities. 

Rhee spoke after the BOK kept its seven-day repurchase rate at 3.5% Thursday, an outcome that matched the expectations of all 19 economists surveyed by Bloomberg. The bank last raised the rate in January 2023 and has since kept it at that level, which it characterizes as restrictive.

The BOK also left its headline forecasts unchanged, including its view that inflation will average 2.6% this year, slightly above the consensus of economists, with economic growth of 2.1%. It lowered its projection for core inflation a whisker to 2.2%, an indication that the underlying price trend is continuing to soften.

Rhee’s comments built on a warning against overconfidence on the inflation path in the central bank’s statement earlier in the day.

“While it is forecast that domestic economic growth will continue its improving trend and that inflation will maintain its slowing trend, it is premature to be confident that inflation will converge on the target level,” the BOK said in the statement.

Continuing growth in exports provides the BOK with another reason to refrain from easing its monetary settings. The board expects external demand to help the trade-reliant economy grow faster this year compared with last year. 

What Bloomberg Economics Says...

“Growing uncertainty over the path of Federal Reserve policy gives the BOK another reason to keep its policy rate in a restrictive zone for now.”

— Hyosung Kwon, economist

To read the full report, click here

Speculation over policy pivots this year by the Fed and European Central Bank has helped spawn the expectations that the BOK might follow suit, even as uncertainty abounds, particularly in the US.

“With inflation inching down toward 2% at the end of this year, arguments for a cut may start to strengthen, but there’s still unease in reducing the rate ahead of other central banks in the US and Europe,” said Moon Junghiu, an economist at KB Kookmin Bank. “The board is likely going to exercise patience when it comes to a rate cut.”

The BOK reiterated in its statement that it would keep an eye on policy moves in other major economies. When asked at the briefing, Rhee indicated he couldn’t say whether the bank would cut rates before or after the Fed.

Rhee already said last month that he doesn’t foresee cutting interest rates in Korea for at least another half year. A newly added member of the board, Hwang Kunil, appeared to back that view when he expressed concern over higher-than-targeted inflation upon joining the board earlier this month.

Hwang also highlighted a series of factors weighing on the South Korean economy, including weakening growth potential. The economy grew at a slower pace last year than in 2022, partly under pressure from global interest rates raised by central banks.

The early cracks in board unity will feed into expectations that debate on the board will heat up. The dynamics of the board are also likely to undergo further possible change when two more members are replaced in the spring.

That’s a point flagged by Woo Hye-young, fixed-analyst analyst at Ebest Investment & Securities Co.

“The fact there is a board member open to a rate cut means there is at least one person who could call for a cut at the next meetings,” she said.

(Adds Rhee’s comments, market reaction)

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