THE Bank of Korea (BOK) is expected to keep its policy settings unchanged on Friday (Apr 12), opting to continue its inflation fight in a steady manner as the nation undergoes a major political change and two of the bank’s board members prepare to exit.

All 23 economists polled by Bloomberg forecast the South Korean central bank will keep its benchmark rate at 3.5 per cent, a decision that would underscore continued caution towards early policy pivots. The bank last hiked in January 2023 and has since kept the rate at a level it calls “restrictive” to tame inflation.

Inflation was among the key topics on the minds of voters when they cast their ballots in Wednesday’s parliamentary election, which resulted in a major defeat for President Yoon Suk-yeol even though his government had launched a series of initiatives to suppress inflationary pressure, including incentives for retailers to cut grocery prices and a temporary freeze in public utility charges.

The BOK remains wary of the potential for inflation to flare up again. Last month, consumer prices rose 3.1 per cent, exceeding expectations and staying well above the BOK target of 2 per cent. Household debt is another concern keeping the monetary authorities cautious about signalling a policy pivot too soon.

“Keep calm and hold on,” Kim Sung-soo, an analyst at Investment & Securities, said. “Inflation is showing the last mile is not easy.”

In a sign of waning market expectations for rate cuts, South Korea’s policy-sensitive three-year bond yield has risen about 24 basis points this year to 3.39 per cent, closer to the BOK rate of 3.5 per cent. Meanwhile, the swaps market is currently pricing in zero rate cuts in the next six months.

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Several factors are backing the case for the BOK to keep rates high. A continued rebound in exports and industrial production indicates the economy is doing fine even with the policy settings. South Korea’s output of semiconductors, central to industrial strength, jumped the most in 14 years in February, while exports of them reached the largest monthly total since 2022 last month.

Then there is the currency. The South Korean won has weakened around 5.6 per cent this year, joining declines in most global peers against the US dollar after robust US data clouded expectations for a near-term rate cut by the Federal Reserve. With market participant convictions that the Fed will deliver three rate cuts this year having weakened, it would be hard for the BOK to loosen its stance.

Stable exchange rates are crucial for South Korea as it relies heavily on imports for food and energy. A rapid weakening of the won also risks triggering capital outflows and unsettling financial markets – an outcome the BOK would want to avoid at all costs.

The BOK will see two of its early inflation fighters depart from the board after the decision on Friday. Cho Yoon-je and Suh Young-kyung are the only members who were present when the board decided to pull the rate up from a record low of 0.5 per cent in 2021.

Even after their departure, the board’s mood is not likely to turn dovish right away. After the previous decision, governor Rhee Chang-yong said he would not expect a rate cut in the first half. The BOK will have five decisions left to make in 2024 after the April meeting.

Still, the BOK’s tone has turned less hawkish of late. In February, one board member was open to a potential rate cut in the short term if deemed necessary, while five members saw the current rate as favourable. That was a change from January, when no one made the case for being open to a cut.

The next change from the BOK could be a tweak to its policy statement to signal more room for easing, according to Citi Research analysts Kim Jin-Wook and Choi Jiuk. The BOK “may open the scope for a gradual normalisation of monetary policy in the rest of this year due to dovish risk factors”, they said in a note.

Those factors could include a worsening of credit risks for construction companies, a slowdown in private spending and an escalation of geopolitical tensions that weigh on global trade.

“We expect the BOK to remain on hold in the upcoming meeting, with an incrementally dovish tilt,” Goldman Sachs economists led by Goohoon Kwon wrote in a note. They forecast a policy easing cycle would begin in July, with a second cut in the last quarter of 2024. BLOOMBERG