South Korea: BoK enters an impasse in its tightening cycle – UOB

Economist at UOB Group Ho Woei Chen assesses the latest interest rate decision by the Bank of Korea (BoK).

Key Takeaways

“Bank of Korea (BoK) kept its benchmark 7-day repo rate unchanged at 3.50%... pausing after it hiked consecutively for the past seven meetings and a cumulative 300bps increase since Aug 2021. The rate decision was in line with consensus expectation.”

“However, the rate decision was not unanimous with one policy board member (out of six, excluding Rhee) voting for the interest rate to be hiked by 25bps at today’s meeting.”

“The BoK slightly lowered its GDP growth to 1.6% (previously 1.7%) and inflation forecast to 3.5% (previously 3.6%) for 2023.”

“Despite keeping interest rate unchanged, the BoK continues to maintain a hawkish bias. Governor Rhee pointed out that the rate hold today does not imply that the interest rate has peaked for the current hiking cycle. Five board members see the terminal interest rate at 3.75% (vs. three in the Jan meeting), meaning possibility of a further 25bps hike has increased.”

“We continue to expect an extended pause at 3.50% unless the inflation trajectory turns higher from here. There will be more data until the next monetary policy meeting on 13 Apr that could affect our expectation including two more months of trade and CPI data (Feb and Mar) as well as any changes in the outlook for China’s economic recovery and US Fed’s monetary policy tightening trajectory. Particularly for domestic inflation, we expect the headline CPI to start to recede below 5% in Mar due to the high base effect. Movement of the KRW may also influence the BoK’s decision making.”