People walk on a zebra crossing in front of the buliding of Bank of Korea in Seoul, South Korea. REUTERS/Kim Hong-Ji/File photo
BENGALURU – The Bank of Korea (BOK) will keep its key policy rate unchanged at 3.5 percent on Thursday and for the rest of the year as inflation continued to ease, a Reuters poll of economists predicted, but rate cut forecasts were pushed back by a quarter to early 2024.
While inflation in major economies remains elevated, prompting the U.S. Federal Reserve and European Central Bank to pursue policy tightening, it fell to a 21-month low in South Korea last month, bringing it closer to the central bank’s 2-percent target.
That is good news for the BOK, one of the first to start raising rates in August 2021, which had paused tightening in February as its total 300 basis-point hikes weighed on an economy with some of the most heavily indebted households globally.
All 46 economists in the July 4-10 Reuters poll expected no change at the conclusion of the BOK’s meeting on July 13 to the 3.5 percent base rate, already the highest since late 2008.
“With monetary policy settings already in restrictive territory, inflation easing and the KRW (Korean won) stabilizing, there is little impetus for the central bank to hike rates further,” said Irene Cheung, senior Asia strategist at ANZ.
“That said, with the U.S. Fed still hawkish and domestic inflation expectations elevated, we believe the BOK will continue to push back expectations for a quick easing pivot.”
Bank of Korea flags upward risks to core inflation
Median forecasts showed interest rates would remain on hold until the end of this year, followed by a 25 basis-point cut in the first quarter of 2024.
In a May poll the quarter percentage-point cut was expected to come by end-2023.
Bank of Korea seen to hold rates until end of September, cut in Q4
The BOK’s stance was likely to put pressure on the won, already down about 3 percent against the dollar this year.
But a rate cut will depend on how quickly inflation falls. It was not forecast to drop below the central bank’s 2 percent target until the third quarter of next year, averaging 3.3 percent this year and 2.1 percent next.
The survey also predicted South Korea’s economy would grow 1.2 percent this year and 2.3 percent in 2024, the same as the previous survey.
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