MNI BOK WATCH: Pause Flagged as Economy Weakens

The Bank of Korea will likely hold its Base Rate at 3.5% at its upcoming policy-decision meeting on Tuesday April 11, as the bank switches focus to economic growth over inflation, according to observers.

“The inflation rate has peaked and the bank is focused on the accumulated impact of the past rate hikes on the economy,” a person familiar with BOK policy and the Korean economy said. The BOK will focus on the risk of a softer economy led by a weaker IT sector and demand for semiconductors, and a potential mid-2023 recovery was uncertain, the official noted.

Rhee Chang-yong, governor at the BOK, signaled in February the bank would likely pause rates and monitor the economy until global uncertainties resolved. He did not rule out the possibility of further increases, but repeatedly stated hikes were not needed should annual inflation ease toward a forecast 3% by the end of the year. "That is the situation facing us, so it is time to stop and wait," Rhee said.

But the central bank may need to raise the Base Rate 25bp to 3.75% – a level many regard as the terminal rate, according to another BOK watcher. The Bank, however, will not rush to hike amid a weaker economy and will continue to watch the U.S. Federal Reserve's rate hikes and their impact on the U.S. dollar, the commentator noted.

DATA POINTS

Exports fell 13.6% y/y in March for the sixth straight drop due to the slowing global economy and weak demand for semiconductor-related goods. Exports of semiconductors fell 17.1%, while automobile exports declined 4.8%, offsetting the increase of exports of chemicals and industrial machines. Industrial production fell 3.2% m/m in February, reversing from a 2.4% increase in January, indicating sluggish corporate activity.

The BOK's shift to a more dovish policy stance represents an about-face from its February 23 meeting, when the board flagged further hikes would be necessary despite economic weakness (See: MNI BOK WATCH: Flags More Hikes But Wary On Growth). However, the country's consumer price index has printed lower than anticipated. CPI recorded its lowest level in 12 month at 4.2% y/y in March, slowing from a 4.8% rise in February. The BOK had forecasted 5% for February's CPI at its last meeting.

Following the CPI print, the BOK said inflation would likely ease further, but remain higher than its 2% target. Core inflation was expected to cool at a slower pace and uncertainty over global energy prices, world, and domestic economic trends, and public cost increases persist, the BOK noted.