By Anant Chandak
BENGALURU, Feb 20 (Reuters) – The Bank of Korea is expected to maintain its key policy rate at the current level for the ninth consecutive meeting on Feb. 22. This expectation aligns with the consensus among economists polled by Reuters, affirming their long-standing prediction that the first rate cut might not occur until the third quarter.
While inflation dipped to a six-month low in January, members of the Bank of Korea board remain firm in their conviction that monetary policy should continue to be restrictive in order to bring it down to the bank’s target of 2.0%.
The commitment to maintaining the current rate stems from the apprehension that any premature rate cuts might serve to reignite inflation expectations. Moreover, the cumulative 300 basis points of hikes implemented between August 2021 and January 2023 could present a considerable threat to already highly indebted households.
All 38 economists in the Feb. 13-19 poll concurred that the central bank will leave the base rate (KROCRT=ECI) unchanged at 3.50% on Feb. 22.
“As inflation is still above the BOK’s 2% target and economic recovery is gaining momentum led by strong export growth, the BOK will not cut rates at this meeting,” remarked Nomura economist Jeong Woo Park.
Park added, “For the rest of the year, however, I expect rate cuts to start in July as I expect a fear of recession to rise again. The worsening housing market downturn would remain headwinds against private consumption.”
Median forecasts indicated that interest rates would remain unchanged until the end of June, in line with the stances of many regional central banks. This would be followed by 25 basis-point cuts in both the third and fourth quarters, aligning with the expectations from a January poll.
Among economists who provided forecasts through September, 19 of 28 expected the key policy rate at 3.25%, eight saw it at 3.00%, and one at 2.75%.
“We forecast two base rate cuts in the second half of this year. Our projections are contingent on the U.S. Federal Reserve’s rate-cut cycle. Should the Fed move more swiftly than our forecast – we expect four cuts in 2024 – the BOK may respond by cutting rates further,” said Chong Hoon Park, head of research at Standard Chartered Bank Korea.
Park added, “Korea’s growth prospects for the year are not robust, given that the current interest rate level is deemed high for both consumption and investment.”
The economy was expected to grow 2.1% this year, as per a January poll, showing an improvement from a three-year low of 1.4% in 2023.
(Reporting by Anant Chandak; Polling by Veronica Khongwir and Devayani Sathyan in Bengaluru and Jihoon Lee in Seoul; Editing by Hari Kishan, Jonathan Cable and Tomasz Janowski)
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