South Korea’s central bank slows tightening pace
South Korea’s central bank yesterday slowed the pace of rate hikes, sharply cut its 2023 growth forecast and tweaked the language used to describe its rates outlook, suggesting it could be headed towards the end of its tightening cycle.
The Bank of Korea (BoK), trying to tame inflation without choking off economic growth, anonymously decided to hike its benchmark policy rate by 25 basis points to 3.25%, the highest level since 2012, after delivering a half-percentage point increase in October.
Governor Rhee Chang-yong said the central bank could continue to hike rates as needed “for some time”, having previously given no timeframe for its tightening path.
Analysts said the addition of “some time” was dovish and when pressed on it, Rhee said it referred to a period of three months.
But he said it was too early to discuss when rates would be cut.
“We said ‘some time’ to describe the trend of interest rate hikes and that’s three months,” Rhee told a news conference.
“Beyond that, uncertainties are high. We do not have a rate decision scheduled for December, and there is a FOMC decision coming, there is also December inflation to watch, and then we have policy rates to decide in January.”
The BoK is in the midst of its most aggressive tightening on record, having raised rates by 275 bps since August last year and delivered two bigger 50-basispoint hikes during the cycle for the first time since the current monetary framework was introduced in 1999.
Policymakers are trying to balance the need to curb inflation — at 5.7% versus a target of 2% — against rising debt, falling property prices and slumping exports.
Analysts said the addition of “some time” to the rates outlook suggested the BoK’s monetary tightening could end soon.
“That means policy tightening should continue at least through next February, and it is also the surest clarification yet, that the current tightening cycle could end in the first quarter,” said Paik Yoonmin, fixed-income analyst at Kyobo Securities Co Ltd.
The BoK expected the economy to expand 1.7% in 2023, down sharply from a previous forecast for 2.1% growth, but stuck to this year’s 2.6% growth projection. It trimmed its 2023 inflation forecast to 3.6% from 3.7%.
Rhee also said the central bank’s board members were split on terminal rates — the level at which interest rates would peak in the current tightening cycle.
Out of the seven board members, one saw rates peaking at 3.25%, three at 3.5%, and the remaining two at 3.75%, he said.
The BoK is expected to end its rate hikes at 3.5% by the end of March, according to a median forecast of analysts in a Reuters poll.
The slowdown in tightening has also been facilitated by a rebound in the local currency.
As aggressive US monetary tightening buoyed the dollar this year, many central banks in Asia have sought to hike rates in step with the Federal Reserve to
keep their currencies from weakening too much against the greenback, risking capital outflows.
South Korea’s won has rebounded more than 7% from a 13-year low against the dollar touched in late October.
The BoK’s 25-basis-point hike is smaller than recent moves by some regional peers. Central banks in the Philippines and New Zealand have pressed ahead with outsized rate hikes after the Fed’s four consecutive 75-basis-point rate increases.