Bank of Korea holds rates steady at 3.5%, dismisses rate-cut talk

Bank of Korea’s Monetary Policy Board at a rate-setting meeting held in central Seoul on Tuesday. The board kept the rate unchanged for the second time in a row at 3.5 percent. [BANK OF KOREA]

The Bank of Korea (BOK) kept the policy rate unchanged Tuesday at 3.5 percent for the second time in a row but warned it’s too early to discuss a rate cut.

Bond analysts expected the central bank to hold steady, and the vote of the Monetary Policy Board was unanimous.

Five members of the seven-person board said the terminal rate should be 3.75 percent, while one said the rate is already there.

Concerns were expressed about “the output cut by oil producers and the growth gap and timing of public utility fees,” the BOK Governor Rhee Chang-yong said at the post-meeting press conference in central Seoul Tuesday.

“They also pointed the need to monitor the response of key nations, including the U.S. Federal Reserve, to the Silicon Valley Bank collapse.”

The Fed slowed rate increases this year to a quarter percentage point in February and March. Its policy rate is currently in a range of 4.75 percent to 5 percent.

The central banker said it’s too early to discuss a rate cut, adding the BOK’s no.1 goal is stable prices.

“We have the will to accomplish price stabilization through monetary policy until we achieve” lower inflation to a certain extent. Rhee added that expectations of a rate cut are believed to be “an excessive response” by the Monetary Policy Board.

Inflation was 4.2 percent in March from 4.8 percent in February on declines in the prices of petroleum products and processed food. The BOK forecasts inflation to fall to the low 3 percent range by the year-end.

Rhee said that Korea is able to respond to volatility in foreign exchange rates “anytime.”

“Unlike in the past, we are a creditor country and have more than $420.5 billion in foreign reserves. So no matter the extent of trade deficit or the volatility of the change, we don’t have to be too concerned like in the past, and there are multiple measures to handling it,” Rhee added.

The won is trading at around 1,320 won, from the low-1200 range in early February.

Korea’s exports fell for the sixth consecutive month in March due to a weak global economy and a slump in the chip sector.

The Tuesday decision signals the central bank’s “wrap-up” of the monetary tightening cycle, a strategist at Shinyoung Securities, Cho Yong-gu, said in a Tuesday report.

The central bank’s indication that it will lower the 2023 economic growth forecast from the 1.6 percent forecast of February is a sign that it understands that the rapid interest rate increases have had an effect on the economy, Kwon Ki-joong, an analyst at IBK Securities, wrote in a report.

“Rhee stressed there won’t be a rate cut this year, but the pressure to cut rates is expected to grow as the year-end approaches.”

Stocks rallied Tuesday, with the Kospi up 1.42 percent, while the won largely unchanged.

The yield on the three-year treasury bond was quoted at 3.203 percent, little changed.

The next Monetary Policy Board meeting is to take place on May 25, following the two-day Federal Open Market Committee meeting that starts on May 2.

According to the CME FedWatch Tool, a quarter-point increase is likely.

The U.S. Consumer Price Index for March is to be released Wednesday.

BY JIN MIN-JI [jin.minji@joongang.co.kr]