May 23 2024: South Korea’s central bank maintained interest rates at a 15-year high on Thursday, signaling a cautious approach amid persistent inflationary pressures despite stronger-than-expected economic growth.
Key Points
Interest Rates: The Bank of Korea (BOK) held its benchmark interest rate steady at 3.50%, the highest level in 15 years. This decision was unanimous and expected by all 43 analysts polled by Reuters.
Policy Stance: BOK Governor Rhee Chang-yong emphasized that the bank will maintain a restrictive policy stance to combat sticky inflation and monitor the economy’s performance closely. There is uncertainty about the timing of any future rate cuts.
Economic Growth: The BOK raised its growth forecast for the year to 2.5% from 2.1%, following the fastest quarterly growth in two years during the first quarter. However, the bank retained its February inflation outlook for this year at 2.6%.
Inflation Concerns: Although April headline inflation eased for the first time in three months to 2.9%, it remains above the BOK’s target of 2%.
Market Reactions and Expectations
Bond Market: South Korea’s policy-sensitive three-year treasury bond futures rose after the BOK maintained its inflation forecast, reflecting market relief and sustained expectations for future rate cuts.
Analysts’ Views: Analysts, such as Ahn Jae-kyun from Shinhan Securities, anticipate a 25 basis-point cut in the fourth quarter, with the median forecast suggesting the benchmark rate will remain unchanged through the third quarter before a 50 basis-point cut by the year’s end. This outlook has shifted slightly due to stronger-than-expected GDP data.
Context and Implications
Tightening Cycle: The BOK began its tightening cycle earlier than many global peers in mid-2021, raising rates by a cumulative 300 basis points to 3.50%.
Global Influence: The BOK is also attentive to the Federal Reserve’s policy decisions, as any rate cuts in the U.S. could affect the South Korean won and domestic inflation dynamics.
In summary, the Bank of Korea’s decision to hold rates and maintain a tight policy stance underscores its cautious approach to balancing economic growth and inflation control. Market participants are closely watching for signals of when the BOK might begin easing its policy, influenced by both domestic economic indicators and international monetary policy trends.
