MNI BOK WATCH: Pause At 3.5% Expected As Economy Slows

The Bank of Korea will likely keep its policy rate unchanged at 3.50% at Thursday’s policy-decision meeting for the sixth straight time despite higher inflation, as concern grows over a slower economy, observers told MNI.

BOK policymakers, however, will likely maintain a hawkish tone thanks to September's recent sticky inflation read and keep the door open to future rate hikes to prevent market expectations of a premature rate cut.

Statistics Korea reported last week inflation in September was 3.7% y/y, up from August's 3.4% , the highest level since April. (See chart) September core CPI, however, rose 3.8% y/y, slowing from the prior month's 3.9%.

The BOK's tightening bias will also support the currency after it fell to KRW1354 against the dollar in late September, its lowest level since November 2022, as the market frets over the weaker economy. The currency traded at about KRW1353 on Tuesday and has weakened about 6.3% since late July.

“The BOK is likely to keep the policy rate unchanged at least for the rest of this year and possibly until the first quarter 2024, and the timing of a shift to easy policy will be delayed one or two months more than expected,” a South Korean economic specialist told MNI. The person added the market will watch closely the BOK governor's near-term monetary policy outlook remarks given rising inflation.

WEAK DEMAND

Another South Korean economy watcher said the BOK wants to lower the policy rate to address weak domestic demand, but the higher inflation rate will stay its hand.

Market players had previously expected the BOK to cut its policy rate at the beginning of next year, however, the Bank wants to monitor the impact of the past rate hikes on the economy.

The watcher noted adjustments of IT-related goods had progressed and demand for semiconductors is recovering, but how this impacts exports remains uncertain.

Exports fell 4.4% y/y in September, slowing from August's 7.9% fall, the 12th straight drop.

The first specialist pointed to weak consumer spending amid high interest rates and the government's consideration of economic stimulus measures to boost domestic demand. The BOK predicted the economy would pick up in the second half, but it will likely not recover as smoothly as the Bank expects, he added.

The International Monetary Fund left its South Korea growth forecast this year unchanged at 1.4% after the fifth consecutive downward revision.

At the previous meeting in August, the BOK kept its economic growth forecast for 2023 at 1.4%, unchanged from the May forecast, but lowered its growth forecast for 2024 to 2.2% from May’s 2.3%. (See MNI BOK WATCH: Weak Economy Keeps Stance Restrictive)