The Bank of Korea is set to keep its benchmark interest rate steady Thursday as it recalibrates its outlook for an economy that’s damped policy pivot speculation by growing faster than expected this year.
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Published May 21, 2024 • 4 minute read
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(Bloomberg) — The Bank of Korea is set to keep its benchmark interest rate steady Thursday as it recalibrates its outlook for an economy that’s damped policy pivot speculation by growing faster than expected this year.
All 21 economists polled by Bloomberg forecast the South Korean central bank will keep its policy rate at 3.5% for an 11th time. The bank last hiked in January 2023 and has since kept the rate at a level it calls restrictive as it continues to fight inflation. Investors will focus on expected upgrades to the bank’s growth forecast.
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Governor Rhee Chang-yong said earlier this month that the central bank would reconsider the timing of potential interest-rate cuts, signaling a delay after South Korea’s gross domestic product grew 1.3% in the first quarter, soundly beating a 0.6% forecast. The weak won adds to the case for standing pat. The currency has slumped against the dollar as anticipation of near-term rate cuts by the Federal Reserve fades thanks to strong US economic data.
“The magnitude of the BOK’s GDP upgrade will matter for inflation implications,” Jin Choi, an HSBC Global Research economist, said. “It could shake up the board’s overall monetary policy view.”
Rhee said last month that the scheduled re-assessment of the economy and inflation this month would be crucial to the trajectory of policy. Analysts surveyed by Bloomberg expect the South Korean economy to expand 2.5% this year, with the inflation rate seen reaching 2.6%.
The exchange rate in particular adds to reasons for the BOK to maintain caution about signaling a policy pivot. The won has been one of Asia’s worst-performing this year along with Japan’s yen and Thailand’s baht, and South Korea relies heavily on imports for food and energy. The deterioration of the local currency is likely to feed into consumer prices in coming months, economists say, renewing concerns about inflation after price-growth moderated to 2.9% last month from 3.1% in March.
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What Bloomberg Economics says…
“The Bank of Korea continues to play a game of patience. Inflation is coming down but is still above its 2% target. The BOK is also likely waiting for the Federal Reserve to pivot before it shifts to easing — moving before the US central bank would add downward pressure on the won.”
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Household debt is another concern for policymakers. The growth in mortgage loans, a key component of household debt, picked up by 5.8% from a year earlier in the first quarter, pushing up home prices in some urban neighborhoods and indicating consumers are coping with elevated borrowing costs.
South Korea’s trade performance also backs the case for the central bank to take its time. Growth in South Korea’s workday-adjusted exports accelerated in the first 20 days of May, led by semiconductors on burgeoning demand from artificial intelligence developers and data center operators.
The outlook among South Korean chipmakers turned optimistic for the first time in 21 months, while also turning positive for exporters in general for the first time in 27 months, according to a monthly business survey by the Federation of Korean Industries released this week. Overall business sentiment still stayed pessimistic.
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South Korea’s policy-sensitive three-year bond yield has risen about 25 basis points this year to 3.41%. That compares with the central bank’s benchmark rate of 3.5% and signals that expectations for lower rates have ebbed since last year. The swaps market is pricing in zero rate cuts in the next six months.
Two new board members will take part in the decision on Thursday, replacing predecessors who helped oversee the tightening of policy when the bank exited from a record-low pandemic-era rate of 0.5%.
Markets are keen to see how the addition of Lee Soohyung and Kim Jong Hwa might affect the board’s policy tilt. The BOK’s tone turned a little less hawkish early this year. In February, one member was open to a potential rate cut in the short term if deemed necessary, while five saw the current rate as favorable, meaning little need for any further tightening. That was a change from January, when no one made the case for staying open to a possible cut.
Factors that could facilitate a further shift in tone would include credit risks hurting more construction firms, a cooling in private spending and an unexpected slowdown in the exports that are a linchpin for economic growth and broader industrial activity.
“Without a meaningful impact on inflation, the export-driven growth revision should highlight weakness in the domestic economy, which will eventually call for accommodating the domestic economy,” said Kathleen Oh, an economist at Morgan Stanley Asia Limited. She expects the first rate cut to come in the fourth quarter.
—With assistance from Hooyeon Kim, Tomoko Sato and Cynthia Li.
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