Bank of Korea holds policy rate steady at 3.5%, but warns against early rate-cut bets

SOUTH Korea’s central bank on Tuesday (Apr 11) held interest rates steady, and warned against expectations for a rate cut within this year, saying that cooling-but-still-high inflation posed a bigger risk than an economic slump.

Remarks by Bank of Korea governor Rhee Chang-yong at a news conference were largely neutral. But economists said that the unanimous rate decision indicated the board has turned more dovish than at the previous meeting, where one member voted for a hike.

The board kept the base rate unchanged at 3.5 per cent, as it did on Feb 23. The decision was in line with predictions from 39 out of 40 economists surveyed by Reuters, while one respondent had forecast a 25-basis-point hike.

This marks the first time the central bank has left the rate unchanged at successive meetings since its tightening cycle began in late 2021.

“Many of the board members think the market’s expectations for a rate cut within this year are somewhat excessive,” Rhee told reporters, adding there was high uncertainty over the projection that inflation would fall.

He said that five out of the six board members, excluding himself, wanted to keep the door open to one more rate hike. He did not express his own view on a further hike.

Bond yields initially fell on the prediction of poor economic growth, but rebounded after Rhee’s comments. The three-year treasury bond yield was quoted at 3.222 per cent, up 2.3 basis points on the day and above a session low of 3.168 per cent.

Ahn Jae-kyun, fixed-income analyst at Shinhan Securities, said: “The governor had little choice but to show a balanced stance, but the voting was clearly dovish, and I think the market won’t give up its expectations for a rate cut significantly.”

Rhee said this year’s economic growth would be lower than the central bank’s projection of 1.6 per cent, compared with 2.6 per cent growth in 2022. But he added that overall economic conditions would be sound when excluding the effects of the semiconductor sector’s cyclical weakness.

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The Bank of Korea is due to release its revised economic and inflation forecasts at its next meeting, due on May 25.

South Korea’s annual consumer inflation has eased since peaking at a 24-year high of 6.3 per cent in July 2022 to hit 4.2 per cent in March this year, although it is still more than double the central bank’s target of 2 per cent.

Rhee said inflation would have to fall well below the projected rate before the central bank would start cutting rates. REUTERS