The Bank of Korea (BOK) kept its benchmark interest rate on hold while tweaking its guidance to imply it won’t maintain its restrictive stance for a “long” period, inching closer to a neutral stance even as it keeps its options open.

South Korea’s central bank on Friday kept its seven-day repurchase rate at 3.5%, a level it characterises as restrictive, and said it would keep policy there for a “sufficient” period. Previously, the bank pledged to do so for a “sufficiently long” period.

The decision, in line with the expectations of all 23 economists surveyed by Bloomberg, showed that the bank will continue to fight inflation for the time being, but may also be positioning itself for an eventual pivot later this year.

“All entire board members believe that a rate cut in the second half can’t be ruled out in the case that the consumer price index (CPI) slows to 2.3% at the end of this year as expected,” governor Rhee Chang-yong said at a press conference after the decision. “But if the CPI path is higher than 2.3%, or the slowdown is delayed due to oil prices and other issues, a rate cut could be difficult.”

Rhee said the BOK removed “long” from its policy statement in its reference to the duration of the current rate, because it wanted to create room for signalling a possible second-half policy change.

The bank also said in its statement that core inflation is likely to slow to the 2% level by the end of the year. At the time, the board kept its assessment that it’s premature to be confident inflation will slow to its target range.

“The tweak in the policy statement phrase can be seen as the early seeds for future rate cuts,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities. The first rate cut may come in August now, he said.

Friday’s decision shows the board remains worried about inflation, which outstripped expectations in March and stayed above the bank’s 2% target. Rising costs of living were high on the minds of voters when they cast their ballots in Wednesday’s parliamentary election, which resulted in a major defeat for President Yoon Suk Yeol’s ruling party.

Rising costs have been fuelled by weakness in the won. 

The won has been one of Asia’s worst performers this year, slipping by 5.9%. With expectations for US Federal Reserve (Fed) rate cuts having been pushed back, it would be difficult for the BOK to embark on an easing cycle, as it would put further pressure on the won and possibly spur cost-push inflation through imports.

After the faster-than-expected US price growth in March, investors have trimmed their 2024 Fed rate cut predictions to two, with the first not expected until September.

Household debt is another concern keeping policymakers cautious about suggesting a policy pivot may be on its way. On the plus side, continuing growth in exports indicates external demand remains strong enough keep the trade-reliant economy humming this year without the need for monetary stimulus.

“There’s a risk of household debt increases picking up around mortgages with real estate sales rising after the election,” KB Securities analyst Lim Jae-kyun said in a report before the decision, citing a history of such patterns.

In light of the global context, investors will be looking to see if the BOK still shows hints of incipient dovishness. In February, one BOK board member suggested the bank keep the door open to a potential rate cut if needed, while five others preferred to keep the rate on hold for the next three months.

The BOK governor has so far pushed back against any anticipation of early cuts. His case for maintaining a restrictive policy has been further bolstered by the won’s weakness this year, as it’s been among the worst performers against the dollar in Asia.

At the same time, the economy is faring well even with the current policy settings, supported by a continued rebound in exports and industrial production. South Korea’s output of semiconductors, central to industrial strength, jumped the most in 14 years in February, while exports of them reached the largest monthly total since 2022 last month. Also, data on Friday showed that the job market remained relatively tight.

  - Bloomberg