Bank of Korea holds rate but signals possibility of future easing

The Bank of Korea (BoK) held its policy rate for the 12^th straight meeting today (July 11) while saying it would consider a rate cut at an “appropriate time”.

The BoK’s seven-member monetary policy board decided unanimously to keep the base rate at 3.5%, a level unchanged since January 2023. The board raised rates by a total of 300 basis points between August 2021 and January 2023 to curb inflation.

In a statement, the central bank said inflation has continued its slowing trend, mainly due to the effects of a sustained restrictive monetary policy stance.

But the BoK said there is a need to further assess whether inflation will continue its slowing trend. It said it needs to pay attention to the impact of foreign exchange market volatility and increasing household debt on financial stability.

“The board sees that it is appropriate to assess domestic and external policy conditions while maintaining its current restrictive policy stance,” the BoK said.

The consumer price index rose 2.4% year on year in June, slower than 2.7% in May and the weakest since July 2023. The bank has an inflation target of 2%.

The board expects inflation to continue to slow, due to the modest consumption recovery and the base effect from the sharp rises in global oil and agricultural product prices last year.

It expects consumer price inflation to fall to the lower 2% range. Annual headline inflation for 2024 could be slightly lower than its May forecast of 2.6%, the central bank added.

The board expects core inflation to gradually slow to 2% and be consistent with its May forecast of 2.2% for the year.

The won has weakened by more than 6% against the dollar so far this year but has performed better than some other regional currencies such as the yen and the yuan.

Speaking at a post-meeting press conference, governor Rhee Chang-yong said the bank has made “considerable progress” in stabilising inflation. He said it is “gaining confidence that inflation is converging on the target level”.

“Therefore, we believe that the base rate cut can be considered at an appropriate time in the future,” he said.

But Rhee said it is “still difficult to predict” when to start cutting rates, as uncertainties around the future path of inflation have not been completely resolved.

Rhee said the board will determine the timing and size of a rate cut, based on an assessment of the slowing trend of inflation, as well as the trade-off between growth and financial stability that may arise from rate cuts.

The bank expects Korea’s economy to continue its modest growth with a gradual recovery in consumption and an ongoing increase in exports. It has maintained its GDP forecast of 2.5%.

South Korea’s GDP grew 3.3% year on year in the first quarter. On a quarter-to-quarter basis, the economy grew 1.3% in the January-March period, compared to the previous three months.

The Organisation for Economic Co-operation and Development (OECD) said South Korea’s economy is recovering from the global inflation shock.

South Korea’s growth is driven by strong export prospects with renewed demand for computer chips amid surging investment in artificial intelligence, the OECD said in a note today.

It expects the country’s growth to be 2.6% in 2024 and 2.2% in 2025, up from 1.4% in 2023.

The OECD expects inflation in the country to fall from 3.6% in 2023 and 2.5% in 2024, allowing for monetary policy easing later this year.

‘Dovish shift’

Min Joo Kang, senior economist at ING, said the BoK’s statement signalled a “dovish shift” in their policy stance.

“The BoK is evidently more confident than it was that inflation will move towards their 2% target,” Kang said in a note.

Kang said the BoK statement suggests that it has shifted its focus from inflation to financial market stability. She noted that the BoK dropped the phrase from its May statement that “upside risks to inflation forecasts have increased”.

She said ING is leaning towards an October cut rather than an August cut, pointing to the board’s unanimous decision today to keep rates unchanged this time. “The BoK is in no hurry to cut rates,” she said.