Bank of Korea Governor Rhee Chang-yong speaks during a press conference at its headquarters in Seoul, Friday. Joint Press Corps-Yonhap
No rate cuts expected until end of 2023
By Lee Min-hyung
The Bank of Korea (BOK) took a baby step, Friday, increasing its key rate by 25 basis points to 3.5 percent as the economy still comes under inflationary pressure.
"Prices are still at a high level, and are forecast to hover above our target range for a considerable amount of time," BOK Governor Rhee Chang-yong said. "Despite the possibility that the 2023 GDP growth here could be lower than our earlier forecast of 1.7 percent, we pushed for the rate hike to stabilize prices."
Consumer prices here increased 5 percent in December from a year ago. The figure is showing signs of slowing down its pace of rising after peaking out at 6.3 percent in July. But it has remained at a high level of more than 5 percent for eight months since May.
This is the first time ever that the Korean central bank has pushed for seven consecutive rate hikes.
The Fed is widely forecast to adjust its pace of policy tightening in line with signs of a slowdown in inflation. The U.S. consumer price index increased 6.5 percent in December from a year earlier. This is a decline of 0.1 percent from November, the first monthly drop since May 2020. The U.S. benchmark rate soared to a range of 4.25 and 4.5 percent after the Fed took a giant rate hike of 75 basis points four consecutive times last year to tame inflation.
The BOK rate hike narrowed the interest gap between Korea and the U.S. down to 1 percentage point. The market outlook is that the Fed will also take a baby step in February and increase the key rate in the range of 4.5 and 4.75 percent.
The aggressive set of rate hikes made by the Fed put pressure on the BOK to follow suit last year. But if the Fed makes a less hawkish move, the Korean central bank will be able to end its ongoing cycle of rate hikes to within the range of 3.5 and 3.75 percent.
Experts expected the BOK to take another baby step during the next rate-setting meeting due to the lingering inflationary woes and the Fed's possibly additional rate hikes.
"The Fed is still sending signals for additional rate hikes, so that it can reach a target price of 2 percent," Kim Dae-jong, a professor of business administration at Sejong University, said. "The Fed is expected to carry out more rate hikes and put an end to its ongoing rate hike cycle sometime in the latter half of this year. The BOK will have to follow in the same footsteps a couple more times."
BNP Paribas economist Yoon Jee-ho saw it a slim possibility for the BOK to enter a cycle of rate cuts before the end of this year.
"Lingering concerns of headline inflation may prevent the BOK from starting a rate-cutting cycle in 2023. We expect rate cuts in the first quarter of 2024," he said. "Given that the consumer price index is highly likely to remain well above the central bank's 2-percent target throughout 2023, we think it is too early to discuss rate cuts."
"We are keeping our terminal policy rate at 3.75 percent in this rate-hiking cycle to be reached by either February or April," he said.
According to the BOK, Korea's export price index declined 6 percent in December from a month earlier. This is the largest fall since April 2009. The central bank explained that price falls of petroleum products and electronic devices drove the overall decline of the index.
"The price of coal, petroleum, chemical and electronic products dropped amid sluggish demand triggered by the global economic slowdown and international oil price fall," Suh Jeong-seok, an official from the BOK's price statistics division, said.
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