South Korea holds rates, reveals hawkish split within board
Pedestrians crossing a road in front of the Bank of Korea headquarters in Seoul on July 13, 2022. South Korean economic growth unexpectedly picked up in the second quarter as strong consumption on eased Covid-19 restrictions offset poor exports, supporting the case for further central bank interest rate hikes.
Jung Yeon-je | Afp | Getty Images
The Bank of Korea kept its benchmark interest rate unchanged on Thursday, while a hawkish split within its seven-member board signaled an imminent turn toward a more restrictive policy stance to curb inflation and support a slumping won.
Five of the seven members on the central bank’s monetary policy board voted to keep its benchmark interest rate unchanged at 2.50%, while two dissenters voted for a hike.
The decision to hold was expected by 30 of 32 economists polled by Reuters. The two outliers forecast a rate rise.
The meeting also marked the policy debut of new central bank governor Shin Hyun Song.
The central bank revised up this year’s inflation estimate to 2.7% from the 2.2% projected before the Iran war started, factoring in the spillovers from rising oil prices. It raised this year’s growth forecast to 2.6% from 2.0% previously, reflecting the robust first-quarter expansion of 1.7%, the fastest in nearly six years.
Complementing this hawkish shift, the bank’s updated dot plot — which charts policy rate projections over the next six months by board members in 21 dots — revealed a bias towards taking rates higher to 3% in the next six months. Two dots even predicted the rate rising to 3.25%.
South Korea’s policy-sensitive three-year treasury bond futures KTBc1 turned down sharply after the dot plot and policy statement were released, erasing early gains.
The hold reflects a cautious approach by new governor Shin, who is due to give his first news conference at 0210 GMT to communicate whether the central bank is ready to take interest rates higher as inflationary pressures broaden further.
Analysts expect Shin to be more hawkish than his predecessor, Rhee Chang-yong, and to prioritize price stability and currency defenses over supporting growth.
“We expect the BOK will hike its policy rate to 2.75% at the next meeting in July, followed by another rate hike in October, pushing the rate towards 3.00% by the end of the year,” said Stephen Lee, an economist at Meritz Securities in Seoul.
“Inflation figures are not high but the positive output gap, rising inflation expectations, and rising housing prices will be main reasons behind the hikes.”
Headline inflation is breaching the central bank’s 2% target with the 2.6% April rate marking the fastest gain in almost two years.
A weakening won KRW=, down 4.5% this year against the dollar, is also effectively bringing inflation into domestic supermarkets and factories, adding further price pressure for a nation dependent on Middle Eastern energy imports.
An insatiable global appetite for semiconductors is drumming up the nation’s phenomenal export cycle, helping to almost double the benchmark Kospi this year and generating spillover benefits for local suppliers and factories.
Markets have been wagering on a hike.
Around two-thirds of the economists polled predicted at least one rate hike by end-September, a sharp shift from last month’s survey, when only three of 30 economists expected a quarter-point hike.
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