Bank of Korea modifies hawkish policy tilt, keeps rate unchanged

THE Bank of Korea (BOK) shifted to a more neutral policy stance, with the board essentially calling time on any further rate hikes after standing pat, in a move that will further fuel speculation over a policy pivot later this year.

South Korea’s central bank kept its seven-day repurchase rate at 3.5 per cent on Thursday (Jan 11), as forecast unanimously by 12 economists surveyed by Bloomberg. In its statement, the board jettisoned a phrase that it would consider the need for further hikes, and governor Rhee Chang-yong said at a press conference that all five members were in favour of holding the rate where it is over the next three months, effectively making the current rate the peak.

At the same time, Rhee also said he expects the rate to stay high for a considerable period, adding that the board is of the view that it is premature to even talk about potential rate cuts.

“If you asked me, personally I think cutting the rate wouldn’t be easy for at least the next six months or more,” he said. “We have to see if the inflation trajectory will take shape in the direction we forecast.”

The decision reflects the board’s determination to keep fighting inflation that is proved persistent, and to remain vigilant against a rise in household borrowing. While consumer prices continue to rise at more than 3 per cent, the bank sees the pace slowing to its target range of 2 per cent towards the end of this year.

“Justification for a pivot to a cut is still not strong,” said Ahn Jae-kyun, a fixed-income analyst at Shinhan Securities. “We may be seeing a hold through the first half at least.”

Among factors that may have encouraged the BOK to take a more neutral tone is credit risk associated with local developers. Taeyoung Engineering & Construction last month asked for a rescheduling of its debt after relying excessively on short-term borrowing. It received a cash infusion from its parent on Monday, and faces a creditor vote on Thursday on its restructuring plan. In his remarks, Rhee said there was no need to worry excessively about Taeyoung’s situation.

In 2022, a default by a government-backed developer of Legoland Korea sent ripples through the financial industry before authorities stepped in with a rescue plan. That prompted the BOK to slow the pace of rate hikes.

The BOK began its tightening cycle in August 2021, earlier than most peers, including the Fed. After the US central bank signalled last month that it could pivot earlier than expected, the BOK faced speculation it might join the Fed in shifting its tilt. So far, the BOK has pushed back against such notions, saying each central bank will have to follow its own course of action this year.

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Record household debt levels are an incentive to keep policy restrictive, and some bright spots in the economy are adding to confidence among policymakers that growth can stay resilient under high interest rates. Exports have begun to rebound after a year-long slump, industrial production has expanded from year-ago levels for three months in a row and the labour market remains relatively tight.

“Policymakers are concerned that premature rate cuts could cause debt to reaccelerate,” said Dave Chia, an associate economist at Moody’s Analytics. “Inflation and household debt remain too high for comfort.”

The latest Bloomberg survey of economists projected two cuts by the end of 2024. That is one fewer than in a previous survey.

“Improving macro environments are broadly supportive of financial stability, including disinflation, associated declines in borrowing costs and a recovery in the current account,” Goldman Sachs economists led by Goohoon Kwon wrote in a report prior to the decision.

“A challenge for monetary policy is how to balance the need for timely easing, to limit financial stress while still maintaining incentives for household deleveraging.” BLOOMBERG