Bank of Korea Vows to Stay Restrictive As It Holds Rate Steady

The Bank of Korea held its benchmark interest rate steady and retained its hawkish bias as it seeks to rein in inflation while also avoiding adding pressure on an economy that faces headwinds ranging from risks of a debt crisis to slumping exports.

(Bloomberg) — The Bank of Korea held its benchmark interest rate steady and retained its hawkish bias as it seeks to rein in inflation while also avoiding adding pressure on an economy that faces headwinds ranging from risks of a debt crisis to slumping exports.

The central bank kept its seven-day repurchase rate at 3.5% on Thursday as forecast by all 18 economists surveyed by Bloomberg, and reiterated a pledge to stay restrictive for “a considerable time.” The BOK has stood pat since it last raised the rate in January.

In his post-meeting press conference, Governor Rhee Chang-yong said the decision was unanimous and noted it will take “considerable time” before consumer inflation cools to a pace well within the bank’s target. The BOK largely kept its economic forecasts intact, although it nudged up its 2023 estimate for core consumer inflation.

The decision didn’t trigger any major moves in the won, as it added to gains versus the dollar as part of a broader move in markets.

As was the case in recent meetings, all six members of Rhee’s board said they were open to another hike by a quarter percentage point if such a move is deemed necessary in the future, in a reminder that the battle against inflation remains at the top of their agenda.

“The status quo is the best way to go for the time being,” said Kim Sung-soo, a fixed-income analyst at Hanwha Investment & Securities Co. “We could be seeing a hold continuing at least through the first quarter of next year.”

Rhee highlighted some persistent concerns, saying banking-sector risks have yet to be fully resolved. Although authorities have taken steps to stabilize the sector, pockets of vulnerability remain. 

The governor added that household debt levels are already weighing on economic growth and noted that they’ve increased more than expected in recent months. Household debt adds to challenges for policymakers who fear heavily indebted consumers will have to cut back on spending. How to bring debt down without causing a crash is a key issue, Rhee said.

After the meeting, the central bank released inflation and growth forecasts for the current year that were unchanged from previous estimates, saying it still expects the economy to expand by 1.4% and consumer prices to rise by 3.5%. It raised its core CPI forecast for 2023 to 3.4%, and trimmed its 2024 GDP growth forecast to 2.2%, a move that reflects the impact from slowing activity in China, Rhee said.

“While Rhee left the door open to more policy tightening, the possibility for that to become a reality is low, especially since Rhee acknowledged Korea’s current real interest rate is high,” said Stephen Lee, chief economist at Meritz Securities.

The trade-reliant economy has been hit by weak overseas demand for South Korean products, particularly in China, where property-market woes are among a host of challenges undermining the growth outlook. South Korea’s exports to China fell 25.1% in July, outpacing the 16.5% decline in overall shipments.

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“A pivot to a looser stance is unlikely until the Federal Reserve changes course.”

— Kwon Hyosung, economist

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Even as risks to the growth outlook persist, the BOK has been steadfast in its battle to cool price pressure as a top priority. Consumer inflation slowed to 2.3% in July, but monetary authorities expect it will accelerate back to the 3% level toward the end of the year.

Adding to the risks for the BOK is the possibility the Federal Reserve may keep its policy rate elevated for longer as the US economy chugs along with more momentum than previously expected. That’s giving the BOK another reason to keep its policy restrictive as Korean rates remain below US rates by the widest differential on record. That gap has weighed on the won this year, although Rhee said current currency levels aren’t a reason for concern.

Fed Chairman Jerome Powell is set to deliver a keynote address at the annual Fed event in Jackson Hole on Friday. Rhee said the BOK potentially might veer from the Fed in adjusting its policy path.

“It’s quite a dilemma for us if the Federal Reserve maintains a tight policy for a considerable period of time and it starts to affect our monetary policy,” the governor said.

The won has been among the weakest performers in Asia this month. Its deterioration against the dollar was a key reason the BOK raised the rate at a faster-than-usual pace in the second half of last year. 

The BOK’s vow to stay restrictive comes amid increasing indications that the tightening cycles in many developed nations are nearing a peak if not already there. While many Fed officials see upside risks to inflation, two were open to taking a pause in July. The swaps market is pricing in no more increases.

In Europe, worse-than-expected numbers Wednesday from Germany and France prompted market bets to shift toward a pause in ECB hikes next month.

(Adds details from Governor Rhee’s press conference)

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