Bank of Korea keeps rates steady, in line with expectations

Bank of Korea Gov. Rhee Chang-yong at the Monetary Policy Board meeting held at the bank's office in central Seoul on Thursday. [BANK OF KOREA]

The Bank of Korea kept its policy rate unchanged Thursday for the third time in a row, holding it at 3.50 percent.

It was a widely expected move, according to a survey conducted by the Korea Financial Investment Association.

Almost 90 percent of respondents to the survey projected the central bank's Monetary Policy Board would keep the rate steady, citing stabilizing prices and the U.S. Federal Reserve's signalling it would end monetary tightening at the May Federal Open Market Committee (FOMC) meeting, the association said Tuesday.

The survey was conducted from May 12 through May 17. It involved one hundred people covering bonds, including analysts and brokers.

Inflation was 3.7 percent in April, down from the 6.3 percent peak reached last July. It was the lowest figure since the 3.7 percent in February last year. But core inflation, which excludes volatile food and energy, was 4.0 percent, unchanged from a month earlier.

Price uncertainties remain following the government's announcement in early May that it would raise second-quarter electricity rates and gas prices on high global energy prices and the mounting losses at the state-run utilities.

"We think it's the right time for us to kind of assess the accumulated impact from this rapid increase," Bank of Korea Gov. Rhee Chang-yong said in an interview with CNBC early May.

The bank upped the rate by 300 basis points over a year and a half, which was a "very fast in pace," Rhee added. "I think the tightening cycle in advanced economies seems close to an end," given financial stability issues in the United States and Europe.

Analysts project the central bank to keep the rate steady throughout the year, despite stubbornly high core inflation.

"It seems difficult to revise down the core inflation forecast" due to the rise in utility fees, "making it difficult to expect a rate cut this year," said Shin Earl, an analyst at Sangsangin Investment & Securities.

The Bank of Korea will likely keep the rate steady even if the Fed ups the rate at the next FOMC meeting in June.

"Despite the growing rate gap between Korea and the United States, there aren't clear signs of a concerning level of a capital outflow, so the Bank of Korea will not likely technically follow the Fed's rate decision," Shin added.

Foreign investors net purchased $3.25 billion of stocks and bonds in April, the most since the $3.7 billion last July, according to Bank of Korea data.

Park Chun-sup and Chang Yong-sung have been newly added to the Monetary Policy Board. Park is a former chief of the Public Procurement Service and Chang is an economics professor at Seoul National University.

Their thoughts on the policy rate isn't yet clear, but they aren't likely to have been hawkish at the inflection point of the economy, according to Kim Ji-na, a fixed income analyst at Eugene Investment, in a report Monday.

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