Global: South Korea’s Central Bank Maintains Cautious Stance on Interest Rates

On Friday, South Korea’s central bank expressed increased caution regarding the inflation outlook and export strength, influencing its decision to maintain the policy rate at a 15-year peak, rather than pursuing a near-term interest rate cut.

Bank of Korea (BOK) Governor Rhee Chang-yong, speaking at a news conference after the decision to hold the key rate at 3.50%, conveyed the collective uncertainty of the board about future rate cuts. “Looking six months ahead, it’s challenging for all board members, including myself, to predict the likelihood of a rate cut in the second half of the year,” he stated.

The BOK emphasized that it would need to observe further progress toward its 2% inflation target before it considers reducing borrowing costs. Despite the governor suggesting that rate cuts this year might be difficult, the BOK’s latest policy statement hinted at the possibility, noting it “will maintain its restrictive monetary policy stance for a sufficient period,” subtly shifting from its previous position of maintaining this stance for “a sufficiently long period.”

Following the announcement, South Korea’s three-year treasury bond yield saw a partial recovery, after initially dropping by up to 7.3 basis points to 3.393% during Rhee’s address.

Analyst Cho Yong-gu from Shinyoung Securities detected some uncertainty in Rhee’s remarks. “Rhee clarified that he wasn’t signaling a cut yet and board members find it hard to forecast. However, the slight adjustment in the wording of the policy statement opens the door to potential rate cuts within the next six months,” Cho explained, predicting two rate cuts in the latter half of the year.

Analysts are anticipating a 25 basis-point reduction in both the third and fourth quarters, potentially lowering the benchmark rate to 3.00% by year-end from the current 3.50%.

Rhee also highlighted that the BOK would be keeping an eye on international policy developments, including signals from the European Central Bank about possible rate cuts starting in June and the evolving monetary policy direction of the U.S. Federal Reserve. This global context allows the BOK more autonomy in adjusting its rate policies in response to domestic price movements.

Despite steady consumer price index (CPI) growth of 3.1% year-on-year in March and a consistent rise in exports driven by strong chip sales, the central bank faces additional pressures. These include higher oil prices and a weakening won, which has depreciated about 6% against the dollar this year, potentially exacerbating inflation by increasing the cost of imported fuel and raw materials. In response to concerns about the weakening currency, Rhee stated, “We are monitoring to see if the won’s recent declines are excessive, and we have measures to stabilize the currency market if necessary.”