BOK expected to turn more dovish in 2nd half to spur growth

Rate freeze likely in next week's monetary policy meeting

By Yi Whan-woo

The Bank of Korea (BOK) is anticipated to become more dovish in its monetary policy through the second half of the year, to support the government's efforts to spur economic growth, analysts said Friday.

Correspondingly, experts speculate that the BOK will keep its benchmark interest rate steady at 3.5 percent for the fourth straight time in its upcoming rate-setting meeting scheduled for next Thursday.

“The BOK perhaps has every good reason to hold its rate unchanged in the second half, as concerns over inflation, the U.S. rate policy and foreign capital, which pressed the BOK to embrace a hawkish stance are easing,” said Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI).

Regarding inflation, year-on-year growth in consumer prices slowed for the fifth straight month in June and dipped to the 21-month low of 2.7 percent.

Last month's reading is in line with the BOK's yearly inflation forecast.

Also in June, the Fed paused 15 months of base rate hikes although Fed Chair Jerome Powell said that U.S. inflation is still higher than the target goal of 2 percent and therefore, left the door open for additional rate increases.

The U.S.-Korea interest gap has risen to a historic high of 1.75 percentage points despite the Fed's rate pause, with the U.S. rate staying in the range of 5 to 5.25 percent against Korea's 3.5 percent.

While usually, such a gap leads to concerns over the outflow of foreign capital in search for safe-haven assets, oddly Korea is enjoying huge inflows of foreign capital.

Stocks and bonds purchased by foreign investors were worth $11.43 billion in May, marking the biggest amount in 23 years since relevant data started being compiled, according to the BOK.

Such inflows are attributed to expectations concerning the recovery of global demand for chip orders, with chipmakers Samsung Electronics and SK hynix being top stock picks.

“All these circumstances create room for the BOK to maneuver flexibly in its inflation fight and focus more on a growth-oriented policy,” the KERI researcher said.

Joo Won, deputy director of the Hyundai Research Institute, voiced a similar view, saying, “Growth should be at the top of the agenda for both fiscal and monetary policymakers.”

In their respective updated economic outlook, the BOK and the Ministry of Economy and Finance revised down Korea's 2023 growth forecast to 1.4 percent from 1.6 percent due to a protracted export downturn.

He said the recent surplus in trade and balance and current account balance “could last only temporarily” and that “it is early to perceive them as a sign of an economic recovery.”

In June, exports dropped to their lowest level, of 6 percent year-on-year since October 2022, according to the Ministry of Trade, Industry and Energy.

Imports also dropped 11.7 percent year-on-year, prompting the country to end a losing streak in its trade balance, dating back to February and posting a trade surplus of $1.13 billion.

Separate data from the BOK showed Friday that the country's current account returned to the black in May, posting a surplus of $1.93 billion in May following a deficit of $790 million.

Asked when the BOK may start cutting the rate, Lee said that a rate cut may occur as early as August.

Hana Bank researcher Seo Jung-hoon disagreed, arguing that, “The rate cut may come only after summer considering core inflation in Korea is still volatile while the U.S. Federal Reserve is open to resuming rate hikes.”

Core inflation excludes volatile food and energy prices and is used to measure the long-term price trend. It can vary with the trend of headline inflation.

Core inflation eased to a 14-month low of 3.5 percent in June, but could bounce back as it greatly depends on global oil prices.