Bank of Korea hints at pivot towards policy easing after standing pat

By Cynthia Kim and Jihoon Lee

SEOUL (Reuters) – South Korea’s central bank on Thursday hinted it may pivot towards monetary easing along with its global peers, sending bond futures up after a widely-expected decision to keep its policy interest rate unchanged for an eighth meeting.

The Bank of Korea (BOK) held its benchmark rate at 3.50% at a policy review in Seoul, an outcome correctly forecast by all 38 economists polled by Reuters.

Crucially, the central bank also dropped language from its previous statement that it will ‘judge the need to raise base rate further,’ in its strongest hint yet of a shift towards policy easing after delivering a total of 300 basis points of hikes since mid-2021.

“In financial and foreign exchange markets, long-term Korean Treasury bond yields have fallen due to expectations of a pivot in monetary policy stances both at home and abroad,” the BOK said in the statement, and added that risks related to real estate project financing have heightened.

South Korea’s policy-sensitive three-year treasury bond futures extended gains following the statement, up by as much as 0.19 points to 105.14.

Analysts expect the BOK to start cutting rates in the third quarter of this year as policymakers see softening price pressures would return inflation to the bank’s 2% target either by the end of this year or early next year.

The BOK, currently at the end of its tightening cycle, is expected to move cautiously on any rate cuts as they watch the pace of monetary easing by the U.S. Federal Reserve and any money market jitters related to the country’s ongoing efforts to restructure debt-ridden companies.

Some analysts expect policy easing to start sooner than consensus estimates.

“A key reason why we expect rate cuts soon is that price pressures are easing…In addition, a weak economy will help to put downward pressure on underlying prices, said Ankita Amajuri, economist at Capital Economists in a note to clients, noting that a forecast drop in oil prices would also help slow inflation.

“Overall, we expect the central bank to leave interest rates unchanged at its next couple of meetings, but with growth set to struggle and inflation falling, we have pencilled in a rate cut for the BoK’s May meeting,” Amajuri said.

Consumer inflation eased for a second month in December to 3.2%, bringing relief to policymakers worried about persistent price risks after the bank said they plan to keep their restrictive policy in place for longer.

South Korean officials have been bracing for trouble in the credit market after Taeyoung Engineering & Construction, a mid-sized builder, said it plans to restructure debt in late December, which put property debt in the construction sector back into the spotlight amid high borrowing costs.

Governor Rhee Chang-yong will hold a news conference at around 0210 GMT, which will be livestreamed via YouTube.

(Reporting by Cynthia Kim and Jihoon Lee; Editing by Shri Navaratnam)