While South Korea Maintains Stable Interest Rates, Investors Are Observing the Timing of a Pivot

At a policy review in Seoul, the Bank of Korea (BOK) maintained its benchmark interest rate (KROCRT=ECI), opens a new tab at 3.50%, as anticipated by all 38 analysts polled by Reuters. The BOK kept the rate unchanged for the ninth consecutive meeting.

The BOK maintained its inflation and economic growth forecasts for this year at 2.6% and 2.1%, respectively, in conjunction with the rate announcement.

The economic growth of Asia's fourth-largest economy has been halted by South Korea's 300 basis point interest rate hikes, as construction investment has been negatively impacted by higher financing costs, despite the sustained improvement in exports.

Governor Rhee is anticipated to concur with international counterparts including the Federal Reserve and the Reserve Bank of Australia at a post-policy news conference, discouraging wagers on a near-term easing. Although inflation has decelerated, it remains above the 2% target set by the central bank.

Rhee cautioned markets in January against prematurely anticipating a rate reduction, stating that he sees little likelihood of rate cuts occurring within the next half-year due to persistently high inflation.

Since then, data has emerged indicating that consumer inflation in January declined to a six-month low of 2.8%. While this figure remains significantly below the target of 2% set by the central bank, it signifies a third consecutive month of ease, primarily attributed to a decline in oil prices.

"A reduction in interest rates is not implausible, given the deceleration of inflation and the anticipated challenges to growth," Capital Economics economist Gareth Leather wrote in a report following the rate decision.

"With inflation concerns easing, we are expecting the central bank to start sounding more dovish."

Board members of BOK have cautioned that a resurgence in price pressures could result from acting prematurely, particularly in light of supply-side constraints that pose upside risks.

Analysts predict that the BOK will begin reducing interest rates in the third quarter of this year; however, the timing of this action will be heavily influenced by the Federal Reserve's rate reduction trajectory.

The initial rate determination was rendered on Thursday by board member Hwang Kun-il, whose three-year tenure commenced on February 13.

Rhee will conduct a news conference that will be livestreamed on YouTube at approximately 02:10 GMT.