Bank of Korea extends rate pause, keeps hawkish tilt on price pressures

By Cynthia Kim and Jihoon Lee

SEOUL (Reuters) -South Korea’s central bank kept its interest rate unchanged for a sixth straight meeting on Thursday while retaining a tightening bias, as policymakers stayed alert to higher oil prices that could interrupt a moderation in inflation.

The Bank of Korea (BOK) said price pressures would remain for longer than expected due to heightened uncertainties surrounding the Israel-Hamas conflict and global oil prices.

“The timing of consumer price inflation converging on the target level is more likely to be delayed than previously expected,” it said in a statement after keeping its key policy rate at 3.50%, as expected by all 49 economists polled by Reuters.

The South Korean economy has taken a hit from a cumulative 300 basis points of rate hikes since August 2021 that has been adding financial stress to households, among the most indebted in the world.

With markets not anticipating a rise in rates for the rest of the year, the focus is now on whether Governor Rhee Chang-yong will maintain his hawkish bias or signal a policy pivot.

“Above-target domestic inflation will keep the BOK guarded. September’s print exceeded expectations at 3.7%, driven mainly by oil and agricultural prices. U.S. policy uncertainty and the recent resurgence in household debt will also be on the BOK’s radar,” ANZ economist Krystal Tan said ahead of the rate decision.

For the BOK, one of the first central banks to raise rates in August 2021, the battle against inflation is complicated by the risks from slowing growth in China, South Korea’s biggest trading partner and a key driver of the global economy, as well as spiking local bond yields.

The yield on the policy sensitive three-year bond has shot up by nearly a full percentage point from its February low. Three-year treasury bond futures extended losses and were down 0.23 point at 102.32 by 0139 GMT.

Governor Rhee said last week that headline inflation would slow to just above 3% by the year-end before eventually reaching the central bank’s target of 2% by the end of next year.

One challenge for the central bank is to tamp down on speculation about the prospect of rate cuts without triggering unwarranted confidence that financial market conditions are tight enough to cool inflation, analysts say.

Most analysts expect the BOK to hold rates through the first quarter of next year and cut them by 25 basis points to 3.25% in the second quarter of 2024.

The economy grew more strongly than expected in the second quarter by a seasonally adjusted 0.6% in April-June, marking the biggest quarterly growth since the second quarter of 2022.

Inflation, which had eased steadily to 2.3% in July from a peak of 6.3% last year, accelerated for a second month in September and faces upside risks as uncertainties from the outbreak of war between Israel and the militant Palestinian group Hamas persist.

Governor Rhee will hold a news conference at around 0210 GMT, which will be live streamed via YouTube.

(Reporting by Cynthia Kim and Jihoon Lee; Editing by Jacqueline Wong)