BOK to keep policy rate unchanged until Q3 despite easing inflation

By Anant Chandak

BENGALURU (Reuters) – The Bank of Korea will keep its key policy rate on hold for a ninth consecutive meeting on Feb. 22, according to all economists polled by Reuters, who stuck to their long-held view the first rate cut would come in the third quarter.

Despite inflation declining to a six-month low in January, most Bank of Korea board members see the need for monetary policy to stay restrictive for some time to bring it down to the bank’s 2.0% target.

Although BOK Governor Rhee Chang-yong said any premature rate cuts could reignite inflation expectations, a cumulative 300 basis points of hikes between August 2021 and January 2023 could pose a significant threat to highly indebted households.

Still, the central bank will leave the base rate unchanged at 3.50% on Feb. 22, said all 38 economists in the Feb. 13-19 poll.

“As inflation is still above the BOK’s 2% target and economic recovery is gaining momentum led by strong export growth, the BOK will not cut rates at this meeting,” Nomura economist Jeong Woo Park said.

“For the rest of the year, however, I expect rate cuts to start in July as I expect a fear of recession to rise again,” he said. “The worsening housing market downturn would remain headwinds against private consumption.”

Median forecasts showed interest rates would stay on hold until the end of June, in line with many regional central banks, followed by 25 basis-point cuts in both the third and fourth quarters, the same as expected in a January poll.

Among economists who provided forecasts through September, a majority, 19 of 28 expected the key policy rate at 3.25%, eight saw it at 3.00% and one at 2.75%.

“We forecast two base rate cuts in the second half of this year. Our projections are contingent on the U.S. Federal Reserve’s rate-cut cycle. Should the Fed move more swiftly than our forecast – we expect four cuts in 2024 – the BOK may respond by cutting rates further,” said Chong Hoon Park, head of research at Standard Chartered (OTC:) Bank Korea.

“Korea’s growth prospects for the year are not robust, given that the current interest rate level is deemed high for both consumption and investment.”

The economy was expected to grow 2.1% this year, a January poll showed, picking up from a three-year low of 1.4% in 2023.