Bank of Korea seen to hold rates until end of September, cut in Q4

The logo of the Bank of Korea is seen on the top of its building in Seoul, South Korea. REUTERS/Kim Hong-Ji/File photo

BENGALURU  – The Bank of Korea will keep interest rates unchanged for a third time on Thursday to assess the impact of previous hikes on inflation and economic growth, according to a Reuters poll of economists who were divided over the prospect of a rate cut by the end of the year.

Despite inflation running at nearly twice the central bank’s 2-percent target, the BoK was expected to follow its regional peers and hold rates steady over the coming months to support a fragile economy which narrowly escaped a recession last quarter.

All 40 economists in the May 16-22 Reuters poll expected no change to the 3.5 percent base rate, already the highest since late 2008, at the May 25 meeting.

“Korea narrowly avoided a technical recession in the first quarter, but the GDP output gap runs negatively and we expect Korea’s growth to remain below potential throughout 2023. That’s why we believe no additional hikes from the BoK,” said Min Joo Kang, senior economist at ING.

None of the economists who had a rate view through the end of 2023 expected the BoK to resume hiking rates. However, there was no clear consensus on whether there would be a cut this year.

While 17 of 33 respondents predicted at least a 25-basis-point cut, the remaining 16 forecast the base rate to remain at 3.5 percent until at least the end of 2023.

“We expect the BoK to stay on hold despite growth concerns and easing headline inflation, as core inflation is sticky at twice the inflation target. That said, the odds of a policy rate cut before the end of 2023 are rising,” said Arup Raha, chief Asia economist at Oxford Economics.

South Korea’s economic growth was expected to fall to 1.2 percent this year from 2.6 percent in 2022, a separate Reuters poll showed.

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