At its January 13 meeting, the Bank of Korea (BOK) raised its base rate by 25 basis points, to 3.50%. The decision matched market expectations, but was not unanimous: two of the seven members of the Monetary Policy Committee voted for interest rates to remain unchanged.
Inflation and inflation expectations remained above target in December, pushing the BoK higher. However, inflation and inflation expectations have softened in recent months, which likely explains the BoK’s decision to go ahead with a 25 basis point increase and why the decision to increase was not unanimous.
Meanwhile, the Bank of Korea said it is likely to revise its forecast for 1.7% GDP growth downward this year. However, it kept its forecast for inflation this year unchanged at 3.6%.
In its press release, the Bank of Korea kept the door open to raising interest rates in the future, depending on the evolution of inflation and GDP. Twelve of the panelists surveyed by FocusEconomics do not expect a further price hike in the future, while the other five expect no more than 25 basis points of additional hikes by the end of the year. Our committee expects the BoK to cut the price of the document by 25 basis points in the second half.
The main risks to the monetary policy outlook are the Fed’s stance, the development of the won, continued instability in domestic financial markets, and a sharper-than-expected economic slowdown.
The next BoK meeting is scheduled for February 23.
Analysts at ANZ said:
“For our part, we continue to believe that the BoK’s rate hike cycle is coming to an end amid further slowing growth, moderate inflation expectations and a better outlook for South Korea’s balance of payments.”
Analysts at EIU said:
“We believe the BoK will end the current monetary policy tightening cycle in February, as the domestic inflationary picture continues to improve. This will also reduce negative pressures on the South Korean economy, which is slowing amid weak external demand. If headline inflation remains above 4.5% Throughout the first quarter, the central bank may opt for one more rate hike of 25 basis points. However, we place a low risk of that happening.”
It was agreed that the base rate would end in 2023 at 3.19% and 2024 at 2.45%.