Bank of Korea holds steady but warns against early rate cut bets

1:06 am Tuesday, April 11th, 2023

By Jihoon Lee and Choonsik Yoo

SEOUL (Reuters) -South Korea’s central bank on Tuesday held interest rates steady and warned against expectations for a rate cut within this year, saying cooling but still high inflation posed a bigger risk than an economic slump.

Remarks by the bank’s governor at a news conference were largely neutral, but economists said the unanimous rate decision indicated the board has turned more dovish than at the previous meeting, when there was one member voting for a hike.

The Bank of Korea’s board kept the base rate unchanged at 3.50%, as it did on Feb. 23 and as expected. It was the first time since its tightening cycle began in late 2021 that it left the rate unchanged at successive meetings.

“Many of the board members think the market’s expectations for a rate cut within this year are somewhat excessive,” Governor Rhee Chang-yong told reporters, adding there was high uncertainty over the projection that inflation would fall.

Rhee said five out of the six board members, excluding himself, wanted to keep the door open to one more rate hike. He did not express his own view on a further hike.

Bond yields initially fell on the prediction of poor economic growth, but rebounded after Rhee’s comments. The 3-year treasury bond yield was quoted at 3.222%, up 2.3 basis points on the day and above a session low of 3.168%.

“The governor had little choice but to show a balanced stance, but the voting was clearly dovish and I think the market won’t give up their expectations for a rate cut significantly,” said Ahn Jae-kyun, fixed-income analyst at Shinhan Securities.

Rhee said this year’s economic growth would be lower than the central bank’s projection of 1.6%, compared with 2.6% growth in 2022, but added overall economic conditions would be sound when excluding the effects of the semiconductor sector’s cyclical weakness.

The Bank of Korea is due to release its revised economic and inflation forecasts at its next meeting, due on May 25.

South Korea’s annual consumer inflation has eased since peaking at a 24-year high of 6.3% in July 2022 to hit 4.2% in March this year, although it is still more than double the central bank’s target of 2%.

Rhee said inflation would have to fall well below the projected rate before the central bank would start cutting rates.

(Reporting by Choonsik Yoo and Jihoon Lee; Editing by Sonali Paul)