BOK expected to hold rates in May after Fed pause

Bank of Korea Gov. Shin Hyun-song speaks during his inauguration ceremony at the bank's headquarters in Jung District, Seoul, April 21. Joint Press Corps

The Bank of Korea (BOK) is expected to hold its benchmark interest rate at 2.5 percent at its May meeting, following the U.S. Federal Reserve’s decision to keep its policy rate unchanged, local analysts said Thursday.

Amid heightened economic uncertainty from the Middle East conflict and rising inflationary pressure driven by a surge in global oil prices, the central bank, like its U.S. counterpart, faces limited room for rate adjustments, they said.

The Fed held its benchmark rate in the range of 3.50 percent to 3.75 percent for a third straight meeting, but a surge in dissent — with four members of the Federal Open Market Committee (FOMC) opposing the decision, the most since 1992 — brought a hawkish undercurrent to the meeting.

Market watchers say the central bank is likely to follow suit with a similar “hawkish hold” in May, while keeping the door open to further tightening in the second half of the year.

The BOK's Monetary Policy Board meeting on May 28 will be the first under Gov. Shin Hyun-song, who took office on April 21.

"Given the Fed's trajectory, the BOK is likely to hold its key rate in May in a wait-and-see mode and shift toward gradual rate hikes in the second half of the year. I would say rate cuts are off the table for both economies," said Joo Won, a senior economist at Hyundai Research Institute.

"Stronger-than-expected growth and rising oil prices are pointing toward tightening policy rather than easing."

Korea's economy grew faster than expected in the first quarter, with real gross domestic product (GDP) expanding 1.7 percent from the previous quarter, nearly double the BOK’s earlier forecast of 0.9 percent.

Shoppers are seen at a supermarket in Seoul, April 23. Korea's consumer sentiment turned pessimistic for the first time in a year, with the consumer sentiment index falling 7.8 points to 99.2 in April amid concerns over the Middle East conflict, Bank of Korea data showed. Yonhap

Weak domestic demand is also adding to pressure for rate hikes. A weaker Korean won against the dollar and a surge in oil prices are fueling import price pressures, while inflation remains elevated.

Choi Ji-wook, an analyst at Korea Investment & Securities, said in a report released Tuesday that the central bank is likely to raise its benchmark interest rate twice this year — by 0.25 percentage points each in August and November — bringing the rate to 3 percent.

This marks a shift from his previous outlook, which had projected only one rate hike this year.

"With liquidity still ample, even two rate hikes are unlikely to weigh significantly on the real economy," Choi wrote.

Similarly, Kim Jin-wook, an economist at Citibank, said solid growth and the inflationary pressures of rising oil prices could prompt the central bank to raise rates by 0.25 percentage points in both July and October.

Following the Fed's latest decision, the BOK said it is closely monitoring the future path of U.S. monetary policy, particularly amid uncertainty tied to an anticipated leadership transition, with Fed Chair Jerome Powell expected to be succeeded by Kevin Warsh.

"The latest FOMC meeting revealed a significant divergence of views within the Fed, while also underscoring inflationary pressures stemming from rising oil prices," BOK Senior Deputy Gov. Ryoo Sang-dai said at a market monitoring meeting.

"Prolonged tensions in the Middle East, particularly as negotiations between the United States and Iran face difficulties, are raising concerns about a drawn-out conflict. We will closely monitor domestic and external risk factors and respond in a timely manner if needed."