High prices, delayed US easing warrant rate freeze: BOK chief

Bank of Korea Governor Rhee Chang-yong speaks during a press conference at the bank headquarters in Seoul, Thursday. Yonhap

Sticky inflation and a delayed dovish pivot by the U.S. Federal Reserve have made it hard for the Bank of Korea (BOK) to begin an easing cycle before July, the country’s top monetary policymaker said Thursday.

The stance came on the heels of the central bank leaving the key rate at 3.5 percent, standing pat for the ninth meeting straight since April 2022.

Anchoring the directive is inflation still showing signs of what the central bank has called “rocky downward movements,” as illustrated by the fresh food prices index hitting a seven-year high in January, despite headline inflation moderating to 2.8 percent. The high-2 percent figure is a stable downtrend from the 3 percent level sustained for the past five months straight.

The country’s fiscal and monetary authorities will ensure rigorous and effective implementation of macro-prudential measures for a soft landing of the local property market, the top risk factor that has long undermined the efficacy of the easing cycle, the BOK said.

 

May data crucial

“The rate-setting committee will determine the policy path after a thorough review of incoming May data,” BOK Governor Rhee Chang-yong said during a press conference at the bank headquarters, Thursday.

The pace of inflation slowing down is not fast enough to trigger an easing, compounded further by lingering uncertainties in the global commodity markets, according to the governor.

“Inflation is not trending down nearly as fast as needed, and global oil prices and elevated living expenses limit the downtick in inflation expectations,” he said.

Five of six monetary policy board members, Rhee said, are of the view that the current 3.5 percent will remain appropriate for the next three months. However, one member called for a rate cut, citing economic stagnation brought on and exacerbated by sustained high borrowing costs.

“May data on economic growth and prices will set the monetary policy path forward,” he said.

The probability of what many market watchers have termed the "April crisis" is low, Rhee said. Some observers claim Korea’s authorities are being mobilized to ward off an immediate financial crisis until the general elections, and the pent-up risk factors will cripple the economy after April 10.

Rhee acknowledged that the concerns center on real estate project financing insolvencies and the plummeting overseas commercial real estate market — a combination of two major financial market contagion factors. Korea’s top five financial groups’ exposure to the overseas commercial real estate market totals 20 trillion won ($14.9 billion).

However, the risk exposures are not nearly as significant to bring a catastrophic outcome to the local financial services providers that engaged in lending.

“I would like to ask them instead for proof as to why they raise those concerns which I cannot help but feel are largely overblown,” he said.

Hyundai Research Institute Senior Researcher Ju Won said that Korea will not be able to lower its key rate before the Fed does.

“Maintaining the gap in benchmark interest rates between the two countries has been and will continue to be the single most critical factor for the BOK monetary policy," he said. "The easing cycle will take shape in the latter half, provided that the Fed does it first in the first half.”

Kim Wan-joong, chief economist at Hana Institute of Finance and Hana Bank, expressed a similar opinion. “The BOK is unlikely to initiate a dovish pivot for at least a couple of months," he said. "High prices are of major concern, but equally troubling is the record-breaking household debt. It will be quite a headache having to balance out all relevant factors.”

Korea will register a growth of 2.1 percent this year, in line with last year's forecast. Underpinning the BOK assessment is the continued weakening of consumption due to high borrowing costs and high prices being unable to offset the robust recovery of chip exports. The figure for next year is estimated at 2.3 percent.

Consumer prices on an annual basis are expected to inch up to 2.6 percent this year, the central bank said. The figure will rise as high as 2.9 percent in the first half, before tracking down to 2.3 in the latter half.