South Korea's central bank stands pat after back-to-back rate hikes

[SEOUL] South Korea's central bank kept interest rates steady on Thursday, taking a breather after back-to-back hikes as surging coronavirus cases and escalating tensions in Ukraine cloud the economic outlook.

The Bank of Korea held the benchmark interest rates unchanged at 1.25 per cent, as 27 of 28 economists expected in a Reuters poll.

At the same time, it raised its inflation forecast for this year to 3.1 per cent from 2.0 per cent.

Thursday's rate decision was the last policy review for outgoing governor Lee Ju Yeol, who has led the bank's seven-member board to unwind heavy pandemic-era monetary stimulus with back-to-back interest rate increases.

With Lee's term ending on March 31, his successor will likely need to take interest rates higher to stem inflation in the recovering economy, in line with other major central banks that are rushing to normalise rates.

Policymakers will also be looking at geopolitical risks from the Ukraine crisis and as local Covid-19 cases hit fresh records, presenting headwinds for an economic recovery.

"Policymakers would be assessing the impact of the past three interest rate hikes since August last year," said Yoon Yeo Sam, an analyst at Meritz Securities.

"They would need to check the Fed's policy stance in March and also consider some relief from slowing household debt, home price growth," Yoon said, who sees the BOK raising interest rates twice this year, in the second and third quarters.

Analysts expect the BOK to resume raising interest rates from the second quarter this year, to take the base rate to 1.75 per cent by end-2022.

That would put South Korea well ahead of its major Asian peers and the US Federal Reserve, which are only beginning to turn more hawkish as they navigate tentative economic recoveries and persistent virus outbreaks.

Governor Lee's news conference starts at 0220 GMT, his last before he steps down.

It is unclear whether President Moon Jae In will name a new governor before the March 9 presidential election or leave that decision to the next leader of the country. REUTERS