Fri, Feb 24, 2023 page11

• S Korea keeps door open to fresh rate hike after pause

  • Bloomberg
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  Bank of Korea (BOK) Governor Rhee Chang-yong sought to keep the door open to resuming policy tightening to counter inflation after the board yesterday kept interest rates unchanged for the first time in a year.

  Rhee told reporters that five of the six board members he polled were open to borrowing costs reaching a peak of 3.75 percent after holding the seven-day repurchase rate at 3.5 percent.

  That was an increase from three board members in January. The board comprises seven members, including the governor.

  

  Bank of Korea Governor Rhee Chang-yong speaks at a news conference in Seoul yesterday.

  Photo: EPA-EFE

  “I hope the hold this time isn’t going to be seen as meaning the rate-hike stance is over,” Rhee said.

  One member dissented from yesterday’s decision, calling for a quarter-point rate increase, he added.

  The won extended gains, rising 0.7 percent to 1,295.85 in response to the more hawkish tone, while the yield on three-year government bonds fluctuated.

  “Despite the rate hold, markets reacted much more sensitively to the fact that there were five board members looking at a potentially higher BOK terminal rate,” Shinhan Bank economist So Jaeyong said.

  The central bank said in a statement that South Korean inflation is likely to fall at a slower pace than other major economies, given the potential for a rise in utility costs, which contributed to faster consumer price growth last month.

  Moves by the US Federal Reserve are also likely to factor into BOK thinking in coming months. With US inflation declining slower than expected, speculation is growing that the Fed might again ramp up its pace of tightening.

  Such a development could rekindle the won’s inflation-fueling depreciation.

  “The biggest objective in our monetary policy is to watch how inflation moves, and the foreign exchange rate is secondary,” Rhee said. “Now is the time to check and discuss how the path we forecast unfolds.”

  The central bank provided updated economic and inflation forecasts after the decision, showing little change from esimates in November last year. Economic growth this year was nudged down to 1.6 percent from 1.7 percent, and inflation to 3.5 percent from 3.6 percent.

  Yesterday’s decision to pause reflects concern about fallout from the BOK’s 18-month tightening cycle, with the economy contracting in the final three months of last year and house prices declining.

  Consumption has been slowing in the wake of a deadly crowd-crush in Seoul in October last year, while exports have begun to drop, with a record trade deficit posted last month. A plunge in global semiconductor demand has also led manufacturers to scale back production.

  “For now, the BOK is likely to keep the rate frozen until a possible cut in the fourth quarter,” Kiwoom Securities Co analyst Ahn Yea-ha said. “That’s assuming there’s no serious volatility in the exchange rate and the Fed doesn’t go higher than previously anticipated.”

  The won’s weakening was cited as an important driver of the BOK’s decision to execute larger-than-usual rate hikes last year as the depreciation pushed up the cost of food and energy imports. The won this year has been among the strongest Asian currencies.

  “Unlike last year, I am thinking there’s more room to calibrate the monetary policy while looking at our inflation path,” Rhee said, recalling the BOK’s efforts last year to keep pace with the Fed on currency concerns.
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