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MNI BOK WATCH: Board Maintains Restrictive Stance, Cuts Delayed
Bank of Korea Governor Rhee Chang-yong Thursday maintained his cautious view on the outlook for inflation, stressing increased uncertainty on the timing of a rate cut, following the board's unanimous decision to hold the Base Rate at 3.5%.
Rhee noted a policy-rate reduction would weaken the won further and destabilise financial markets. “The upside risks to the inflation outlook have increased since April and we need more time to gain confidence in the convergence of the inflation target,” he said.
“If the policy stance is shifted too early, there are risks that the pace of inflation moderation could be slower, and the exchange rate volatility and the increase in household debt could expand. On the other hand, if the policy stance is shifted too late, it could weaken the domestic demand recovery and increase the market instability risks due to a continuing rise in delinquency rates.
Rhee added the Bank will comprehensively assess risks on both those aspects and make a decision on monetary policy after the second half of the year.
Thursday’s decisions was largely anticipated. (See MNI BOK WATCH: Board To Hold At 3.5%, Rate Cut Delayed To Q4) The Bank has held the policy rate at 3.5% since January 2023.
RESTRICTIVE STANCE
The Board noted it would maintain a restrictive monetary-policy stance for a sufficient period of time until its confidence over falling inflation grows stronger, a statement published by the BOK said.
The Board will continue to conduct monetary policy in order to stabilise CPI at the target level over the medium-term horizon as it monitors economic growth, while paying attention to financial stability, the board noted.
“While it is forecast that inflation will maintain its slowing trend amid domestic economic growth having improved more than expected, it is premature to be confident that inflation will converge on the target level,” the board added.
South Korean CPI was 2.9% y/y in April, slowing from 3.1% in March and February.
Rhee warned upside risks to inflation have increased due to better-than-expected growth and heightened exchange-rate volatility. “The Board therefore judged that it is appropriate to leave the Base Rate unchanged at its current restrictive level and assess domestic and external policy conditions going forward,” he said.
The BOK left its CPI and core inflation forecasts for the year at 2.6% and 2.2%, both unchanged from February.
HIGHER GDP VIEW
The bank revised its GDP forecast this year to 2.5% from February’s 2.1%, higher than the 2.3% predicted by the International Monetary Fund but lower than the 2.6% expected by the Korean Development Institute, the nation's leading think tank.
The upward revision of the GDP forecast will make it difficult for the BOK to justify rate cuts immediately, which in turn will weaken the won, which could increase inflationary pressure.
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.