The Bank of Korea left its policy rate unchanged for a third straight meeting and lowered its growth forecast for this year, as officials wait for a sustained cooling of inflation amid increasing signs of slower-than-expected recovery.
The central bank kept its seven-day repurchase rate at 3.5% on Thursday as predicted by all 17 economists surveyed by Bloomberg News. South Korea was among the first central banks globally to pause interest rate hikes three months ago.
The Bank of Korea revised down its expectations for annual growth in 2023 to 1.4% from a previous forecast of 1.6%, a move that was widely expected by analysts. While officials maintained their projection for a 3.5% increase in consumer prices this year, they see core inflation lingering for longer than previously thought, boosting their forecast to 3.3% for next year from 3%.
The weaker outlook for growth and expectations for higher-than-expected core inflation help explain the central bank’s cautious approach. Korea’s exports — the biggest driver of the economy — have fallen sharply since late last year and there are few signs of a rebound. The slowdown in overseas demand adds to other risks on the horizon, including a shaky housing market and construction financing issues.
“The growth, inflation projections were broadly in line with earlier guidance of downside risks to growth and balanced risks to inflation,” said Krystal Tan, an economist at Australia & New Zealand Banking Group. “We expect the policy messaging will continue to push back against a quick easing pivot. Barring a significant shift in rhetoric, our baseline is for the first rate cut to materialize in early 2024.”
The BOK sees inflation slowing more than its prior forecast in 2024, with CPI easing to 2.4% from a prior forecast of 2.6%. Still, the central bank’s outlook remains higher than market expectations in a Bloomberg survey of economists. The BOK also sees growth next year coming in a fraction weaker than previously projected at 2.3%.
The Korean won weakened against the dollar after the release of the statement, while the three-year bond yield pared earlier losses to rise to 3.45%.
The growth picture has grown increasingly murky in South Korea, primarily due to weak global demand for its goods and services. There are also several internal risks to the outlook, including consumer spending amid a utility rate hike and higher living costs. The housing market has also slowed as higher interest rates crimp borrowing, further dampening consumption, though prices have started to recover in recent months.
“Any positive spillover effect from China’s recovery has been small, and consumption has remained sluggish especially in terms of investment — that’s probably why the BOK cut its growth forecasts,” said Woo Hye-young, fixed-income analyst at Ebest Investment & Securities Co. Analysts will closely watch the core inflation figure to gauge whether the BOK will stick to more rate holds, she said.
With the gloomier outlook, a number of economists expect the central bank to shift policy toward stimulating the economy in the second half of the year. Investors are also betting on a pivot, with swaps markets pricing in at least one rate cut in the next 12 months.
At the same time, Governor Rhee Chang-yong has cautioned against betting on a rate cut this year, saying officials are still awaiting a deceleration in inflation.
The governor will hold a press briefing later in the morning.
(Adds details from statement)
