Expansion mode: Pedestrians are seen near the BoK headquarters in Seoul. The central bank has raised its growth forecast for this year to 2.5% from a previous projection in February of 2.1%. — AFP
SEOUL: The Bank of Korea (BoK) held its monetary settings steady yesterday, keeping policy tight as the economy hums along at a more robust pace than expected on the back of rising exports and resilient consumption.
South Korea’s central bank kept its seven-day repurchase rate at 3.5%, a level it has characterised as restrictive, matching the prediction of all 21 economists surveyed by Bloomberg.
Authorities may maintain current settings for some time after economic growth in the first quarter surprised to the upside, prompting the BoK to adjust its growth forecasts. In a statement, the BoK noted that upside risks for inflation have increased.
While inflation is seen staying in a slowing trend, “it is premature to be confident that inflation will converge on the target level, as upside risks to inflation forecasts have increased,” the statement said.
Governor Rhee Chang-yong said last month that the re-assessment of the economy this month would be crucial to mapping out policy for the rest of the year.
Analysts surveyed by Bloomberg expect the South Korean economy to expand 2.5% this year, compared with the 2.1% forecast the BoK released in February.
The central bank raised its growth forecast for this year to 2.5% from a previous projection in February of 2.1%, and held its inflation forecasts for this year and next steady at 2.6% and 2.1%, respectively.
“These forecasts make sense,” Cho Yong-gu, an analyst at Shinyoung Securities, said. “They still don’t strike me as a damper for a rate cut later this year.”
The latest predictions for economic growth and inflation matched previous surveys by Bloomberg. Market reaction was muted after the decision. The won held on to a modest decline, while bond futures edged marginally higher.
The weak won bears out the case for keeping the rate restrictive as the local currency is among currencies that have slumped the most against the dollar this year.
The Federal Reserve (Fed) has signalled caution about the outlook for any rate cuts this year as US economic data have been robust, supporting the dollar. The won’s weakness may kindle more inflation in coming months, as South Korea relies heavily on imports of fuel among other products.
“Stronger-than-expected South Korean growth and US inflation readings likely justify the BoK keeping rates on hold for longer,” Pantheon Economics said in a report before the decision.
Bloomberg economist Hyosung Kwon said: “We also think the BoK will wait for the Fed to start cutting rates before it does.
“South Korea’s central bank doesn’t want to risk an early move that could spur further declines in the won – fanning financial stability risks and stoking inflation.”
South Korea’s trade is also doing well. Its workday-adjusted exports rose at a double-digit clip in the first 20 days of May, led by demand for semiconductors. The country is home to the world’s two largest memory-chip producers.
In the property sector, the growth in mortgage loans picked up by 5.8% from a year earlier in the first quarter, underscoring the difficulties of reining in household debt even as the central bank keeps borrowing costs high.
Still, credit risks continue to overshadow the South Korean real estate sector. Finance related to property projects amounted to 230 trillion won as of the end of 2023, equal to 2.8% of total financial-sector assets.
Debt structuring is likely to pick up as 2024 progresses, according to Bloomberg Economics. The performance of the property sector may influence private spending, which has been resilient so far this year. — Bloomberg
