BOK’s Rhee Flags Potential Rate Cut, Inching Toward Neutral

Sam Kim and Hooyeon Kim
·4 min read

(Bloomberg) -- Bank of Korea Governor Rhee Chang-yong flagged the possibility of an interest-rate cut later this year should inflationary pressure ease as expected, joining global policymakers in opening a path toward a policy easing.

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The board believes a rate cut in the second half “can’t be ruled out” if inflation slows to 2.3% at the end of this year, Rhee said in a press conference Friday after the central bank held its benchmark rate at 3.5% for a 10th time, a decision expected by all 23 economists surveyed by Bloomberg.

While Rhee followed up his comment with a caveat that a cut would be difficult if inflation remains hard to rein in, he struck a softer tone than before toward the prospect of easing. Meanwhile, the bank tweaked its policy statement to remove “long” from its previous pledge to keep the rate tight “for sufficiently long.”

“The tweak in the policy statement phrase can be seen as planting early seeds for future rate cuts,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities. The first rate cut may come in August now, he said.

The yield on the nation’s policy-sensitive three-year bond declined about six basis points to around 3.4% following the BOK decision and Rhee’s briefing. The potential for rate cuts combined with broad strength in the dollar weighed on the won which weakened 0.8%.

Rhee told reporters that the BOK removed “long” from its policy statement because it wanted to create room for signaling a possible second-half policy change.

Rhee isn’t alone in looking to a potential policy easing later this year. Keeping its rate steady for a fifth meeting earlier this week, the European Central Bank offered its clearest signal yet that it was prepared to embark on a rate cut should inflation cool. In the US, expectations for a 2024 policy pivot remain intact even though the Federal Reserve may do so later than previously expected.

After the faster than expected US price growth in March, investors have trimmed their Fed rate cut predictions for this year to two, with the first not expected until September.

May will be a particularly important month for the BOK because the board will include economic and inflation forecasts scheduled for release that month among factors under consideration as it plots its next course of action, Rhee said.

“Overall the press statement was a touch dovish or less hawkish compared with February, and surprisingly, the BOK at the press conference went a step further,” said Wee Khoon Chong, senior Asia Pacific market strategist at BNY Mellon.

The bank also said in its statement that core inflation is likely to slow to the 2% level by the end of the year. Rhee maintained that the board remains focused on fighting inflation, which outstripped expectations in March and stayed above the bank’s 2% target.

Rising costs of living were high on the minds of voters when they cast their ballots in Wednesday’s parliamentary election, which resulted in a major defeat for President Yoon Suk Yeol’s ruling party.

Rising costs have been fueled by weakness in the won, which has been one of Asia’s worst performers this year. Rhee said the depreciation of the local currency isn’t unique to his country as anticipation for Fed rate cuts is delayed and that South Korea’s policymakers had the means to deal with excessive swings in the foreign exchange market.

What Bloomberg Economics Says...

“Growing uncertainty over the path of Federal Reserve policy gives the BOK another reason to keep its policy rate in a restrictive zone for now. The Korean won has faced increased downward pressure as market expectations on the timing of a Fed rate cut retreat.”

— Hyosung Kwon, economist

Click here to read the full report

Household debt is another concern keeping policymakers cautious about an early policy pivot. On the plus side, continuing growth in exports indicates external demand remains strong enough keep the trade-reliant economy humming this year without the need for monetary stimulus.

South Korea’s output of semiconductors, central to industrial strength, jumped the most in 14 years in February, while exports of them reached the largest monthly total since 2022 last month. Also, data Friday showed the job market remains relatively tight. The economy is likely to grow 2.1% this year as expected in February or may even do better, the BOK said in its statement.

Five board members favored the rate at 3.5% for the next three months while one was open to a cut if necessary, Rhee said. That matched the preferences disclosed in February.

“It appears that the bank is setting the scene for potential changes in policy later this year,” Kelvin Lam, an economist at Pantheon Macroeconomics, said. “The upcoming May’s outlook will provide further signals of a pivot in rates.”

--With assistance from Shinhye Kang.

(Updates with fifth paragraph and first chart with latest won, bond prices)

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