The Bank of Korea (BOK) is expected to hold its benchmark interest rate steady as it undergoes a reorganisation of its board that may influence the timing of a potential policy pivot later in 2024.
All 19 economists surveyed by Bloomberg forecast that South Korea’s central bank will keep its rate at 3.5 per cent on Feb 22, as the board convenes with a new member. Mr Hwang Kunil, a former World Bank executive director, highlighted higher-than-targeted inflation and weakening growth potential among concerns as he joined the board earlier in February.
Before the addition of Mr Hwang, the Monetary Policy Board (MPB) agreed in January to keep the rate restrictive while telegraphing no changes over the next three months, effectively making the current rate a peak.
If Mr Hwang agrees with that view, it would further indicate that the tightening cycle has come to an end, and might help pave the way for an eventual easing, especially as two other members considered neutral to hawkish will step down in April.
Even with the scheduled departures of board members Cho Yoon-Je and Suh Young Kyung, a rate cut is probably still some way off. Governor Rhee Chang-yong in January said he personally thought it could be half a year before the authorities lower the rate, pushing back against speculation over an early easing.
“A shuffling of MPB members could lead to a relatively dovish composition while likely generating limited impact to BOK’s decisions” in the first half, Citi Research economists Jinwook Kim and Jiuk Choi said in a note. A Bloomberg survey shows that economists expect the BOK to start cutting rates in the July to September period.
The BOK was among the first central banks to start raising rates to exit from pandemic-era stimulus. It held its rate for most of 2023, keeping its focus on taming inflation even as the economy underwent an export slump and grew at a more sluggish pace than in 2022.
Consumer-price growth has slowed to the target 2 per cent range, but the BOK is not rushing to loosen policy. There is potential for inflation to pick up again, the bank said earlier in February, citing uncertainties associated with Middle East conflicts and their impact on oil prices, among other developments. The economy is also maintaining momentum as exports such as semiconductors keep growing, and consumer confidence rose for a third straight month in February.
Still, the board has softened the hawkish tone it maintained in 2023, with board members having ditched a pledge to tighten further if needed. That indicates the bank is wary of economic headwinds. Retail sales returned to a contraction from a year earlier in December while construction investment shrank. Some developers, including Taeyoung E&C, are struggling with debt, and the government is seeking to shore up the sector.
The mix of positive and negative signs means the BOK may keep its economic and inflation forecasts largely unchanged on Feb 22.
“We do not expect the BOK to unsettle markets with a renewed hawkish tone,” Goldman Sachs economists led by Goohoon Kwon said in a note. They still forecast the BOK will start easing in May, earlier than the consensus view.
The yield on policy-sensitive three-year bonds has risen more than 20 basis points since the end of December 2023 as traders rewound expectations for global central banks to pivot early. South Korea’s six-month implied policy rate shows the swaps market is pricing in zero rate cuts for the next two quarters.
Another potential factor influencing BOK policy in the long run is the parliamentary vote in April. The elections are crucial to President Yoon Suk-yeol as he maps out plans for fiscal spending and taxation for the rest of his term that ends in 2027. The South Korean Parliament is now controlled by the opposition.
“Discussion of rate cuts is likely to start from the next meeting in April – after policy uncertainty is removed following the parliamentary election,” said Morgan Stanley Asia economist Kathleen Oh. BLOOMBERG
