BOK signals longer restrictive stance amid high inflation and oil prices

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a post-policy press conference in central Seoul on Friday. The BOK kept its interest rate steady at the 15-year high of 3.5 percent. [BOK]

The Bank of Korea (BOK) kept its interest rate on hold while pledging to maintain its restrictive policy for a “sufficient” period of time amid great uncertainty surrounding the future trajectory of inflation.

The BOK’s Monetary Policy Board unanimously kept its seven-day repurchase rate steady at a 15-year high of 3.5 percent for the 10th straight meeting on Friday amid uncertainties driven by sticky inflation and an increase in global oil price, prompted by geopolitical concerns in the Middle East and supply constraints.

The Korean central bank said it would keep the policy rate there for a “sufficient” period, compared to its February pledge to do so for a “sufficiently long” period.

“It’s difficult, at this point, to prejudge the possibility of a rate cut in the second half of the year,” said the BOK Gov. Rhee Chang-yong during a post-policy news conference in central Seoul. “Whether the inflation will converge toward [the projected] 2.3 percent before we enter the second half of the year will be important.”

The BOK projects that inflation would reach low 2 percent range by the end of 2024 but cited global oil and agricultural prices as uncertainties.

Rhee expects the price of agricultural product to decline as time passes but said those of global oil are more unpredictable.

The price of a barrel of Brent crude oil, the international benchmark, jumped more than 10 percent over the past month to around $90 per barrel.

Core inflation, excluding the volatile prices of food and energy, “is forecast to continue to slow,” Rhee said, “but uncertainties in projection for consumer prices are high.”

Korea’s consumer prices grew 3.1 percent on year in March while those of the United States rose by an unexpectedly high 3.5 percent over the same period.

One board member said they were open to the possibility of cutting rates in response to weak domestic demand and the fundamental decline of inflation. Five others preferred to keep the rate steady for the next three months.

Rhee said the U.S. Federal Reserve’s signal of a pivot, despite the lingering inflation, has given the world's central banks room to decouple from its monetary policy.

The Swiss National Bank cut its main interest rate by 25 basis points to 1.50 percent in March.

But anticipation of the BOK’s early rate cut has been pushed back by the weak won this year, as the domestic currency has been one of Asia's worst performers against the U.S. dollar.

The won broke 1,370 against the greenback on Friday, its weakest showing since November 2022.

“The recent weakening of won is due to the strengthening of the dollar caused by an expectation for the Fed’s delayed pivot. We’re monitoring whether the won weakens excessively compared to its fundamental, in which case would need market intervention,” Rhee added.

“The latest Monetary Policy Board meeting can be interpreted to be dovish,” said Baek Yoon-min, an analyst at Kyobo Securities, in a report on Friday. “A highlight of stabilizing core inflation, despite the increased volatility of headline inflation, reflects the bank’s consideration of a policy shift.”

“The BOK’s rate cut is expected to become possible from July if the ECB [European Central Bank] initiates cutting rates in June and the Fed maintains its signal for a rate cut in the second half during the Federal Open Market Committee meeting,” wrote NH Investment & Securities analyst Kang Seung-won in a report.

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