BOK holds rate steady as U.S. inflation takes a slice out of hopes for Fed cut

Economy

Published: 12 Apr. 2024, 09:50

BOK holds rate steady as U.S. inflation takes a slice out of hopes for Fed cut

Bank of Korea Gov. Rhee Chang-yong at the Monetary Policy Board meeting in central Seoul on Friday. [JOINT PRESS CORPS]

The Bank of Korea (BOK) kept the interest rate unchanged at 3.50 percent for the tenth straight meeting on Friday amid lingering inflation woes in major economies and slumping expectations for rate cuts by the U.S. Federal Reserve this year.

The rate freeze came as U.S. inflation data announced on Thursday showed the headline consumer price index rising more than expected in March by 3.5 percent from a year earlier. Inflation in the United States has been stronger than anticipated for three consecutive months.

With the worse-than-expected inflation, hopes for three rounds of cuts by the Fed this year are quickly fizzling out as well. Traders, as a result, are also slashing their forecast for rate cuts by the Bank of Korea for the rest of the year.

"We are revising our forecast for the U.S. Fed's first rate cut from June to September, as well reducing the projected number of cuts this year from the previous three [in June, September and December] to two [in September and December],” said Huh Jin-wook, Samsung Securities' chief economist, in a report released Thursday.

"Therefore, we are also adjusting our forecast for the timing and frequency of the BOK's rate cuts this year accordingly, reducing it from three times in July, October and November to twice in October and November.”

Fed Gov. Michelle Bowman even signaled that an additional rate hike may be necessary, saying that "we may need to increase the policy rate further should progress on inflation stall or even reverse," calling for a cautious approach in monetary easing.

Korea’s headline inflation accelerated to above the 3 percent threshold for the second consecutive month in March, driven partly by soaring agricultural product prices, while global crude prices ticked upward with the geopolitical tension in the Middle East region growing.

Consumer prices in Korea rose 3.1 percent on-year in March, marking the second consecutive month inflation has exceeded the 3 percent mark following February’s 3.1 percent.

According to the results of a survey by the Korea Financial Investment Association (Kofia) released on Tuesday, 98 percent of bond experts, including analysts, expected the BOK’s Monetary Policy Board to hold the rate steady, compared to 100 percent ahead of the previous rate-setting meeting in February.

Of the respondents, 1 percent forecast a 25-basis-point rate cut for April, and the remaining 1 percent expected a 25-base-point hike.

"While domestic demand has been slow to recover due to slumping private consumption, with the increases in consumer prices standing at the 3 percent level for a two consecutive months in March, the expert consensus was on a rate freeze for the April rate-setting meeting,” Kofia said.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]