Bank Of Korea Keeps Rate Unchanged To Extend Inflation Fight

(Bloomberg) -- The Bank of Korea held its benchmark interest rate steady on Thursday, extending its inflation fight into the new year as market participants increasingly speculate it will pivot at some point this year to ease the strains on credit markets and economic growth.

The South Korean central bank kept its seven-day repurchase rate 3.5%, as forecast unanimously by 12 economists surveyed by Bloomberg. The first decision of 2024 marked an eighth consecutive hold since the last hike a year ago.

The decision reflects the board’s determination to keep fighting inflation that’s proved persistent and to remain vigilant against a rise in household borrowing. While consumer prices continue to rise at more than 3%, the bank sees the pace slowing to its target range of 2% toward the end of this year.

“Justification for a pivot to a cut is still not strong,” said Ahn Jae-kyun, a fixed-income analyst at Shinhan Securities. “We may be seeing a hold through the first half at least.”

Still, the BOK has shown signs it may turn less hawkish this year. The number of members seeing 3.5% as the peak rate increased to two at the previous meeting, and market participants are expecting more may start to share that view. Four said they were open to further rate increases if deemed necessary.

Governor Rhee Chang-yong is expected to disclose how many board members said they remain open to the possibility of hiking further if needed at a press conference starting around 11:10 a.m. in Seoul. He will also reveal whether there were any dissenters to the latest decision.

“We expect the decision to be unanimous,” Jeeho Yoon, an economist at BNP Paribas, said before the decision. Yoon expects the number of board members open to tightening further to “decline significantly” this month.

Among factors making the BOK wary of more tightening is credit risk associated with local developers. Taeyoung Engineering & Construction last month asked for a rescheduling of its debt after relying excessively on short-term borrowing. It managed to get a cash infusion from its parent on Monday, and it faces a creditor vote Thursday on its restructuring plan.

In 2022, a default by a government-backed developer of Legoland Korea sent ripples through the financial industry before authorities stepped in with a rescue plan. That prompted the BOK to slow the pace of rate hikes.

The BOK began its tightening cycle in August 2021, earlier than most peers including the Fed. After the US central bank signaled last month that it could pivot earlier than expected, the BOK faced speculation it might join the Fed in shifting its tilt. So far the BOK has pushed back against such notions, saying each central bank will have to follow its own course of action this year.

Record household debt levels are an incentive to keep policy restrictive, and some bright spots in the economy are adding to confidence among policymakers that growth can stay resilient under high interest rates. Exports have begun to rebound after a year-long slump, industrial production has expanded from year-ago levels for three months in a row and the labor market remains relatively tight.

The latest Bloomberg survey of economists projects two cuts by the end of 2024. That’s one fewer than in a previous survey.

“Improving macro environments are broadly supportive of financial stability, including disinflation, associated declines in borrowing costs, and a recovery in the current account,” Goldman Sachs economists led by Goohoon Kwon wrote in a report prior to the decision. “A challenge for monetary policy is how to balance the need for timely easing to limit financial stress while still maintaining incentives for household deleveraging.”

--With assistance from Cynthia Li.

(Adds economist’s comment)

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