BOK to keep restrictive stance for longer period amid inflation uncertainties

Korea's central bank said Friday that it is hard to predict a policy pivot during the second half of the year, as its current restrictive stance will be maintained for a sufficient period of time amid inflation uncertainties.

In a widely expected decision, the monetary policy board of the Bank of Korea (BOK) kept its policy rate unchanged at 3.5 percent.

The BOK has continued to stand pat following rate freezes last February, April, May, July, August, October, November, January and February. The rate freezes came after the BOK delivered seven consecutive rate hikes from April 2022 to January 2023.

The rate freeze took place as inflationary pressure in Asia's fourth-largest economy still remains high, while Korea's economy has shown signs of a recovery in exports.

"While it is forecast that domestic economic growth will continue its improving trend and that core inflation will maintain its slowing trend, it is premature to be confident that inflation will converge on the target level," the central bank said in a statement.

The BOK said that it will keep its restrictive monetary policy stance for a sufficient period of time until it is confident that inflation is nearing the target level of 2 percent.

Inflation still remains high and there are still high uncertainties regarding monetary policies in major countries and volatility of the exchange rate, and developments in geopolitical risks, it added.

In a press conference, BOK Gov. Rhee Chang-yong said all board members had said it is hard to predict potential rate cuts during the second half of the year given inflation uncertainties.

"It will be increasingly difficult to cut rates should year-end inflation hover above 2.3 percent," Rhee said, adding that the inflation forecast may be adjusted if oil prices remain high for a longer period.

Policymakers have been pinning hopes on easing inflation, but the pace of a slowdown was slower than expected.

The country continued to experience high inflationary pressure last year following the sharpest inflation in decades in 2022.

Korea's inflation stayed over 3 percent for the second consecutive month in March on record prices of fruits and rising global oil prices.

Consumer prices, a key gauge of inflation, rose 3.1 percent on-year last month, following a 3.2 percent increase the previous month.

In January, inflation fell below 3 percent for the first time since July 2023, but high prices of fruits, farm produce and energy have caused inflationary pressure to flare up again.

Recently, global oil prices have hovered around $90 per barrel, and inflation in the United States hit the highest in six months in March as well, which will prod the central bank to remain cautious in cutting rates.

The central bank is also paying keen attention to high household debts, which could further weaken domestic demand.

Household loans extended by banks in Korea fell for the first time in 11 months in March, led by a slowdown in mortgage loan growth, but the level of debt is posing risks to the economy.

Banks' outstanding household loans came to 1,098.6 trillion won ($806 billion) as of end-March, down 1.6 trillion won from a month earlier, according to the data from the Bank of Korea (BOK).

The March reading marks a fall from a 2 trillion-won rise the previous month and an on-month fall for the first time since April last year.

The BOK's rate freeze also came in the face of rising woes over project financing developments, which could wreak havoc on financial institutions and further sap domestic demand.

The central bank's rate freeze followed the Federal Reserve's decision earlier this month to hold its benchmark lending rate steady for the fourth consecutive time.

The Fed kept the rate between 5.25 and 5.50 percent and hinted that its hiking campaign — launched in March 2022 — may be near or at an end.

As to the economic situation, the country's exports remain on the recovery track, while private spending is still feeble.

Korea's exports moved up for the sixth consecutive month in March on the back of the robust performance of chips.

Outbound shipments gained 3.1 percent on-year to $56.5 billion last month, while imports decreased 12.3 percent on-year to $52.2 billion last month, resulting in a trade surplus of $4.28 billion. Korea has been maintaining a trade surplus for 10 consecutive months.

Last year, the economy expanded 1.4 percent, slowing from the previous year's 2.6 percent gain and the 4.1 percent advance in 2021.

For the year, the economic growth is forecast to expand 2.1 percent. (Yonhap)