Bank of Korea stands pat but warns against bets on interest rate cuts
South Korea's central bank yesterday flagged it may not be done tightening, sending bond yields soaring, after it held rates steady for a third straight meeting and trimmed this year's economic growth forecast.
The Bank of Korea's monetary policy board unanimously voted to keep its policy rate unchanged at 3.50 per cent, in a decision matching the view of economists surveyed by Reuters.
It trimmed this year's economic growth forecast to 1.4 per cent from the previous 1.6 per cent, while keeping its inflation projection unchanged at 3.5 per cent.
Governor Rhee Chang-yong, however, issued some hawkish comments on the future policy stance challenging market expectations.
"(The board will) make decisions depending on inflation and other data, and let me request you not to think that we will never be able to raise the rates," Rhee told reporters, pointing to a stunning rate hike this month by Australia's central bank.
Bond yields soared, with the shorter-term yields rising more sharply than longer-term ones, as Rhee's comments prompted investors to cut back bets that the Bank of Korea would not raise rates further but start cutting them this year.
The three-year treasury bond yield rose as much as 12.5 basis points to 3.496 per cent and the 10-year yield by 9.7 basis points to 3.597 per cent.
"Some of his comments were indeed hawkish, but the overall conditions have not changed so much as to revise my views that the central bank may have to cut the rate later this year," said Paik Yoon-min, fixed-income analyst at Kyobo Securities.
Most of the economists surveyed by Reuters ahead of Thursday's meeting had forecast the next rate change would be a cut, probably during the final quarter of this year.
The Bank of Korea started raising interest rates in August 2021 to tame inflation, well before the world's other major central banks, and had raised them by a total of 300 basis points through January this year.
Asia's fourth-largest economy has cooled on sluggish exports and narrowly averted recession in the first quarter. Inflation has slowed since peaking in July last year but still stands far above the central bank's 2 per cent target.
South Korea's producer prices rose in April at the slowest pace in 27 months, as agricultural and utility prices fell, central bank data showed yesterday.
The Producer Price Index stood 1.6 per cent higher in April than the same month a year before, slower than the 3.3 per cent rise in March, according to the Bank of Korea (BOK). It was the slowest since January 2021.
The index fell 0.1 per cent on a monthly basis, reversing its 0.1 per cent gain in the previous month and marking the first fall in four months, with agricultural product and utility prices dragging it lower.
A BOK official said during a media briefing that there were mixed factors that would affect producer inflation in the following months, such as public utility price increases and a fall in natural gas prices.