Bank of Korea to hold base rate at 3.5%, may cut by end of year- Reuters poll

South Korea’s central bank governor Rhee Chang-yong./SeongJoon Cho/Pool via REUTERS/File photo

BENGALURU  – The Bank of Korea will opt to support a rapidly slowing economy by holding its main interest rate at 3.5 percent on Tuesday, according to a Reuters poll of economists that showed a slim majority now expect a 25-basis-point cut by the end of 2023.

Policymakers at the BoK, who have raised rates by 300 basis points since August 2021, are wary of overtightening an export-dependent economy that is on the brink of a recession, especially when global growth is also slowing.

Inflation eased to a one-year low of 4.2 percent in March, but it is still double the BoK’s 2  target and not expected to get to that level for at least another year.

All but one of 40 economists in the April 3-6 Reuters poll expected no change to the 3.5 percent base rate, already the highest since late 2008, at the April 11 meeting. Only one forecast a 25-basis-point hike to 3.75 percent.

“The Bank of Korea has become less hawkish and is almost certain to leave interest rates unchanged,” said Dave Chia, an economist at Moody’s Analytics.

“Considering weak consumption and high household debt, further rate hikes would be devastating to lower-income earners and economic growth. The recent easing of inflation is good news, but volatile oil prices still present a risk.”

BoK Governor Rhee Chang-yong told reporters after the February monetary policy meeting that the central bank would not resume its rate hikes if inflation continued to moderate.

The risk of a prolonged economic slowdown has fuelled market bets that the central bank will cut rates by the end of the year. While a majority of economists in the poll expected the base rate to remain at 3.5 percent until the end of the third quarter, just over half forecast at least one rate cut by the end of 2023.

The BoK’s decision to pause policy tightening is in line with several other major regional central banks who have paused their post-pandemic tightening cycles, such as the Reserve Bank of Australia and the Reserve Bank of India.

South Korea’s economy was expected to grow 1.2 percent in 2023 and 2.3 percent in 2024, while inflation was forecast to average 3.3 percent this year and 2 percent next year.

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