South Korea’s central bank, in line with its counterparts in the U.S. and Australia, sought to temper expectations of aggressive rate cuts on Thursday, opting to keep interest rates unchanged at a 15-year high.
Governor Rhee Chang-yong emphasized that it was premature to consider interest rate cuts, citing inflation levels above the target and the need to monitor its trajectory. The Bank of Korea (BOK) maintained the interest rate at 3.50%, aligning with the expectations of all 38 analysts surveyed by Reuters.
This stance echoes recent remarks from Federal Reserve Chairman Jerome Powell, emphasizing the need for caution in adjusting restrictive policies and ensuring sustained inflation declines.
While the decision to hold rates steady was unanimous, Rhee noted that one board member advocated for keeping the door open for rate cuts in the next three months. This acknowledgment kept the possibility of rate cuts in investors’ considerations, evident in the rise of South Korea’s policy-sensitive treasury bond futures during the announcement.
Analysts like Kong Dong-rak of Daishin Securities interpret this as a gradual preparation for a shift towards interest rate cuts, with expectations of such moves in the third quarter of the year. However, the timing of rate adjustments largely hinges on the actions of the Federal Reserve.
South Korea’s significant interest rate hikes have posed challenges to economic growth, particularly impacting construction investment amid higher borrowing costs, despite ongoing improvements in exports.
Rhee remains cautious about rate cuts in the first half of the year, citing inflation slightly above the central bank’s 2% target. Although consumer inflation moderated to a six-month low of 2.8% in January, it remains elevated, primarily driven by declining oil prices.
The BOK maintained its economic growth forecast for the year at 2.1% and inflation at 2.6%, in line with the rate decision announcement.
Thursday’s decision also marked the first rate-setting meeting for board member Hwang Kun-il, who commenced his three-year term earlier in February.
