BOK chief says tightening not over after rate freeze

South Korea’s central bank chief on Tuesday defied market views that the monetary authority may have ended its tightening campaign, citing growing uncertainties over inflation, after it left its policy interest rate unchanged.

The Bank of Korea kept the base interest rate at 3.50% for a second straight meeting as expected. The central bank raised the rate by 3 percentage points through 10 hikes since August 2021 to curb rampant inflation.

The central bank has been predicted to stop the policy tightening amid concerns over a sharp slowdown in Asia's fourth-largest economy with inflation easing.

“Many of the MPB members think the market expectations are excessive,” BOK Governor Rhee Chang-yong said in a press conference after the policy decision, referring to the Monetary Policy Board, which consists of himself and six policymakers.

“Five members said we should leave the door open for the time being for a further hike to 3.75%, while one said it is appropriate to keep the rate at 3.5%.”

Rhee saw uncertainties over inflation for the second half increasing, given higher crude prices due to oil producers’ output cuts and the impact of potential hikes in utility bills.

He dampened expectations of a rate cut, reiterating his earlier views that it is premature to justify a monetary policy shift.

“It is better not to discuss a reduction until we are confident that inflation is heading to the (BOK’s) mid-to-long-term target,” he said. “I predict inflation to fall to the low-3% level by year-end.”

Consumer price inflation will continue to moderate and decline to the 3% range from the second quarter of this year, the BOK said.

Headline inflation eased to 4.2% in March, the lowest level since April 2022, but is still well above the central bank’s long-term target of 2%. The rate has been slowing since last July when it soared to as high as 6.3%, the highest level since the 1997-98 Asian financial crisis.

SLOWING ECONOMY BUT NO RECESSION

The central bank also said economic growth for this year is predicted to miss its latest forecast of 1.6%. In February, the BOK lowered its gross domestic product growth expectation for 2023 to the level from its previous expectation of 1.7% published in November 2022.

“Economic growth continued to slow due to the sluggish global economy and the impact of interest rate hikes,” Rhee said. “Weakness in consumption was slightly alleviated, but the economy may have expanded only a bit in the first quarter as exports kept significantly falling.”

The economy shrank 0.4% in the fourth quarter of last year from the previous three months, its first contraction in two and half years. Sustained declines in exports added to concerns over a recession in the trade-dependent economy – after two straight quarters of declining GDP.

Exports fell 8.6% to $14 billion and imports skidded 7.3% to $17.4 billion in the first 10 days of the month from a year earlier, resulting in a trade deficit of $3.4 billion, according to customs data earlier in the day. The trade-dependent economy’s shortfall has ballooned to $25.9 billion so far this year, more than half the revised total deficit of $47.8 billion in 2022.

Semiconductor exports tumbled 39.8% and wireless communication device overseas sales slid 38.8%. The country is home to the world’s two largest memory chipmakers – Samsung Electronics Co. and SK Hynix Inc. Samsung is also the global smartphone leader.

Sales to China, South Korea’s largest overseas market, declined 31.9%, while shipments to Vietnam, a key production base of South Korean manufacturers, slid 32.6%.

The outlook for South Korea’s exports is unlikely to improve in the near term.

“The recovery of global economic growth has been more favorable than expected, but economic downside risks have increased due to heightened risks in the financial sector in major countries since the failure of Silicon Valley Bank in the US,” the BOK said.

The International Monetary Fund expects global economic growth to dip below 3% in 2023 and linger around 3% for the next five years -- lower than the average of 3.8% over the last two decades, IMF Managing Director Kristalina Georgieva said last week.

(Updated with BOK Governor comments, details and background)

Write to Jin-gyu Kang and Sang-Yong Park at joseph@hankyung.com
 

Jongwoo Cheon edited this article.