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The Bank of Korea monetary policy board will strongly consider holding its policy rate at 3.50% when it meets Thursday as the bank continues to focus on the slower economy and weak domestic demand.
A hold will represent the central bank's eighth straight decision to leave its policy rate unchanged, following December's call. (See MNI BOK WATCH: Hawkish Hold Issued Amid Persistent Inflation) Attention will focus on whether BOK Governor Rhee Chang-yong downplays his restrictive policy stance amid growing concern over the stability of the nation’s financial system.
“Inflation rates are slowing but bank officials are uncomfortable with persistent high inflation rates, making it difficult for the BOK to ascertain the timing of the first rate cut,” said a market official familiar with Korea's economy and monetary policy. The market will watch closely whether Rhee endorses the broad view that H1 cuts remain unlikely, the official said.
The governor’s New Year speech indicated policy would shift to financial stability issues including credit market stabilisation, although he also highlighted the importance of price stability.
Another Korea economy watcher said the BOK will not want to reduce its policy rate ahead of a Federal Reserve cut. "High uncertainty over the timing of the Fed’s rate cuts is delaying the BOK’s rate cut into the third quarter of 2024,” he said.
South Korea’s consumer price index rose 3.2% y/y in December, slowing from November’s 3.3%, while core CPI rose 4.0% y/y. (See chart) The BOK recently lowered its 2024 growth forecast to 2.1% from August’s 2.2%, but raised its inflation view to 2.6% from 2.4%.
TRADE CONSIDERATIONS
The BOK believes solid external demand will continue to support the economy, however, the high interest rate will weigh on domestic demand and private consumption.
While the rise in exports at 5.1% y/y in December was down from November's 7.8%, it maintained the country's trade surplus for the seventh straight month. Despite its USD4.5 billion trade surplus last month, South Korea recorded an USD18 billion deficit with China in 2023, marking its first such bilateral shortfall with the country in 31 years.
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.