MNI BOK WATCH: Board To Hold At 3.5%, Rate Cut Delayed To Q4

The Bank of Korea board will consider holding its policy rate unchanged at 3.50% at Thursday’s meeting as it awaits more evidence inflation is slowing toward its 2% target, observers told MNI.

The Bank will also likely delay the timing of any potential rate cut to the fourth quarter from Q3 as headline inflation remains far above target.

“The BOK is likely to maintain its hawkish policy stance as there was no factor that prompted the bank to ease its previous tightening bias,” said a person familiar with South Korea's economy and monetary policy.

The BOK has held the policy rate at 3.5% since January 2023. (See MNI BOK WATCH: Board Holds, Maintains Restrictive Stance)

The Bank will not cut its policy rate ahead of the U.S. Federal Reserve and BOK officials are keenly focused on the won and how shifting Fed policy found within the Summary of Economic Projections at the June 11-12 meeting may impact the currency, a separate expert told MNI.

STICKY INFLATION

South Korea’s consumer price index rose 2.9% y/y in April, slowing from 3.1% in March and February. (See chart)

BOK Governor Rhee Chang-yong is expected to maintain his hawkish policy stance, ruling out an imminent rate cut. The governor in early May indicated the bank needs to review the timing of rate cuts, pointing to the recent KRW weakness and Q1's solid 1.3% q/q GDP result, which was driven by increased construction activity and higher private spending for the highest growth in about two years.

South Korea’s exports also showed resiliency, rising 13.8% y/y in April for the seventh straight increase, thanks to strong semiconductor shipments, which rose 56.1% for the sixth straight rise.

Heightened uncertainty over Fed policy and South Korea’s stubborn inflation rate will prevent the BOK from cutting rates early, the first expert added. The second expert noted the BOK will not rush to reduce rates.