MNI STATE OF PLAY: Inflation Dip Allows Bank Of Korea A Pause

A slight dip in inflation allows the Bank of Korea to keep benchmark rates steady ahead of an expected Fed hike in March with stable financial markets also a factor, observers said.

“It is appropriate for the bank to leave the policy rate unchanged and to monitor the impact of the past rate hikes, and the inflation rate hasn’t accelerated,” Kota Hirayama, senior economist in charge of emerging economies at SMBC Nikko Securities, said, see: MNI STATE OF PLAY: Bank Of Korea Rates Now Pre-Pandemic Level.

South Korea's consumer price index rose 3.6% y/y in January, slowing from +3.7% in December.

Hirayama said that the long-term interest rates and the currency are relatively stable, reducing the necessity to raise rates this month. He added that the bank has time to watch the impact of policy adjustments by the U.S. Federal Reserve on global markets before raising the policy rate again.

LAST MEETING, BONDS, FX

The 10-year interest benchmark bond is hovering around 2.7% with the Korean won trading around KRW1,197, after falling to KRW1,211 in late January for the lowest level since June 2020.

Given the overall stable near-term factors, the BOK will not raise the policy rate next week and instead monitor economic activity, a source who is familiar with the BOK said, adding that Governor Lee Ju-yeol, who’s second four-year term ends in March, has already raised the policy rate to the pre-pandemic level of 1.25%.

Still, the source said that housing prices and household debts remain areas of concern.

Hirayama said more rate hikes are likely as central banks in emerging economies accelerate tightening.

“The next meeting (March) will be the last meeting for the governor. He could raise the policy rate (to 1.50%, which is above pre-pandemic level of 1.25%), although there is the possibility that he leaves that to the next governor,” Hirayama said, noting that the governor had signalled more rate hikes this year.

"I don't think 1.5% could be considered as tightening," Lee said in a press briefing after the previous policy decision, adding "(We) raised it today, but I believe it's still accommodative."