MNI BOK WATCH: Rate Steady at 3.5%, Further Hikes Flagged

The Bank of Korea's board has flagged a bias towards further hikes to its Base Rate, but it signalled that concerns over sluggish exports and investments, and growing concerns over the global economy could stay its hand at future meetings.

The BOK's board Thursday decided unanimously to keep its Base Rate unchanged at 3.5% due to growing concern over the weaker economy and despite persistently high inflation (see: MNI BRIEF: Bank of Korea Keeps Policy Rate At 3.50%: Press). This was the Bank's third consecutive pause, following 300bp in cumulative increases since it started tightening in August 2021.

“The Board will continue to conduct monetary policy in order to stabilise consumer price inflation at the target level over the medium-term horizon as it monitors economic growth, while paying attention to financial stability,” the BOK board noted in a statement.

However, the Board struck a cautious tone on future hikes, saying it would "make a judgement while thoroughly assessing the pace of inflation slowdown, the economic downside risks and financial stability risks," as the effects of the Base Rate raises filter through the economy. The Bank also ruled out an imminent rate cut. “The Board will maintain a restrictive policy stance for a considerable time with an emphasis on ensuring price stability,” according to the Board's statement.

INFLATION OUTLOOK

BOK Governor Rhee Chang-yong warned inflation would remain high, though it had slowed in line with forecasts. The BOK revised its inflation view for this year to 3.3% from February’s 3.0%.

“Consumer price inflation is projected to decline significantly in June and July due to the increasing base effect of global oil prices, and then rise slightly to fluctuate at around 3% until the year-end,” Rhee said. He noted the slowdown in core inflation will moderate more than previously expected, due to accumulated cost pressures and services demand.

He said uncertainty oersists over the slowdown in core inflation. “It is forecast that inflation will remain above the target level for a considerable time although it has continued to slow," Rhee warned. "The Board therefore judged that it is appropriate to maintain its current restrictive policy stance.”

FUTURE HIKES

He added the Board will monitor U.S. monetary policy, the timing of the rebound in the IT industry, the domestic impacts of the Chinese economic recovery, and domestic and international financial stability conditions.

Growth turned positive in Q1 2023, but continues to slow, weighed down by sluggish exports and investment. The BOK lowered its growth forecast this year to 1.4% from February’s 1.6%.

“This downward adjustment is mostly attributable to the fact that the recovery in the IT industry and the impacts of China’s economic reopening are slower than initially anticipated,” the Governor added. He said policymakers expect growth to improve from the second half of this year but uncertainty was high.

The Board will next meet July 13.