Bank of Korea seen to hold rates despite still high inflation

BENGALURU  – The Bank of Korea will hold its base interest rate at 3.5 percent on Thursday and for the rest of this year, suggesting its longest tightening cycle on record is over despite still high inflation, a Reuters poll of economists found.

After raising rates by 300 basis points since August 2021, the BOK is managing a shrinking economy – the 0.4 percent contraction last quarter was the first in 2/1-2 years – as well as falling exports and high household debt.

At the same time, consumer price inflation, at 5.2 percent in January, is well over double the central bank’s 2 percent target and is not expected to return there for at least another year, according to a separate Reuters poll.

All 42 economists polled Feb. 13-20 predicted no change to the 3.5 percent base rate, already the highest since late 2008, at the central bank’s Feb. 23 meeting.

Only a few respondents expected rates to climb above 3.5 percent at some point this year, while nearly half expected at least one rate cut by year-end.

Nearly 90 percent of economists who provided forecasts through the first quarter of next year, 26 of 29, expected the base rate to fall below 3.5 percent then, with a majority forecasting 3.00% or above, compared with 3.25 percent or higher in the previous poll.

“Domestic demand faces headwinds from high debt-servicing burdens and a faltering property market; consumer sentiment is also subdued and households are deleveraging,” Krystal Tan, economist at ANZ, wrote.

“Overall, we remain of the view that the BoK will embark on a prolonged rate pause. We expect the first rate cut to materialise in 2024, when we expect inflation to settle around the 2 percent mark and the U.S. (Federal Reserve) to pivot.”

The BOK’s stance differs from many other global central banks that are expected to carry on raising interest rates, including the Fed. That could put pressure on the Korean won, which is down nearly 3 percent against the dollar this year.

Much will depend on how quickly inflation falls over the coming year. It is down from a peak of 6.3 percent in July of last year.

“Towards the year-end, we expect inflation to converge towards the BOK’s medium-term goal, which would therefore open up the room for the BOK to start cutting rates to bring policy into more neutral territory,” Derrick Kam, Asia economist at Morgan Stanley, said.

“The risks to our view are if inflation turns out to be more persistent than we expect or if there is a meaningful hawkish re-pricing of the U.S. Fed policy trajectory.”