South Korea holds rates steady after polls, as it battles sticky inflation

SEOUL – The Bank of Korea (BOK) kept its benchmark interest rate on hold in a decision underscoring its aim to rein in inflationary pressure in a steady manner after an election setback for the ruling party.

The central bank on April 12 kept its seven-day repurchase rate at 3.5 per cent, a level it characterises as restrictive, marking the 10th consecutive decision to hold since it last hiked in early 2023. All 23 economists surveyed by Bloomberg forecast policy would stay unchanged. The won was mostly steady.

The decision shows the board remains worried about inflation, which outstripped expectations in March and stayed above the bank’s 2 per cent target. Rising costs of living were high on the minds of voters when they cast their ballots in the April 10 parliamentary election, which resulted in a major defeat for President Yoon Suk Yeol’s ruling party.

Rising costs have been fueled by weakness in the won.

“The exchange rate makes it more difficult for the BOK to sound dovish,” said Moon Hong Cheol, an analyst at DB Financial Investment. “The question today is how Governor Rhee will interpret the movement in the currency as he’s previously said there are various factors affecting it.”

The won has been one of Asia’s worst performers this year, slipping by 5.9 per cent. With expectations for Federal Reserve 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 drive up 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.

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