Bank of Korea Holds Rate Steady as Market Eyes October Pivot

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(Bloomberg) — The Bank of Korea held its benchmark interest rate steady as authorities seek to rein in rising home prices that are fueling household debt concerns.

The central bank maintained its seven-day repurchase rate at 3.5% in a decision Thursday that met the expectations of 22 of 23 economists surveyed by Bloomberg. One had forecast a quarter-percentage-point cut. 

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The decision extended the BOK’s holding pattern to 13 decisions, the longest stretch since it adopted the current rate as the benchmark in 2008. The board has sought until now to moderate market expectations of a coming policy pivot on concerns that signaling a rate cut might further spur gains in housing prices in Seoul and surrounding regions.

Thursday’s statement reflected a dovish tilt as authorities removed a pledge to keep rates steady “for a sufficient period of time,” implying that the bank is getting closer to a policy pivot.

In its statement, the BOK said the Board will “thoroughly access the tradeoffs among policy variables such as inflation, growth, and financial stability, and examine the proper timing of rate cuts while maintaining a restrictive monetary policy stance.”

For now, an export rally that’s driving economic growth has persuaded monetary authorities they can retain policy settings they consider restrictive for a little while longer. Export growth accelerated in the first 20 days of August with semiconductors leading the momentum. That gives the central bank room to continue cooling potential threats to financial stability.

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“There is no need to rush to a cut when the focus remains on financial stability around real estate and household debt,” said Kim Sung-soo, an analyst at Hanwha Investment & Securities Co. “The economy is holding up well with exports growing, too. So an October cut and then a hold until the end of the year is likely.”

What Bloomberg Economics Says…

“Board members will probably want to assess the impact of stricter macro-prudential measures unveiled by the regulator this week and the government plan to increase housing supply. Our baseline view is that the BOK will start cutting rates in October if these measures show potential to stabilize house-price gains.”

— Hyosung Kwon, economist

Click here to read the full report

The won’s weakness adds to the case for standing pat. Korea’s currency remains among the weakest performers against the dollar this year. Authorities fear a rate cut could usher in further currency depreciation, raising costs of living and production, as Korea relies heavily on imports for food and energy. 

The bank separately announced updated economic forecasts, saying it now expects consumer prices to rise by 2.5% this year, versus a 2.6% estimate in May. The growth outlook for 2024 was also revised lower a tad to 2.4%. Forecasts for 2025 were left unchanged.

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When Governor Rhee Chang-yong speaks in a press conference later Thursday a key focus will be on how he characterizes the likely trajectory of policy and if there were any dissenters to the decision. Market participants will also be interested in where board members see the policy rate in the next three months.

Gross domestic product shrank unexpectedly last quarter after a stronger-than-expected expansion at the start of 2024. Declines in investment weighed on the economic momentum with elevated borrowing costs and uncertain consumption outlooks hurting sentiment. While policymakers have downplayed the slip in growth largely as temporary, economists have noted growing risks.

Slowing inflation and risks to the domestic economy add to the case for considering a cut, Juliana Lee, Asia Chief Economist at Deutsche Bank, said before the decision.

“The passive monetary policy tightening amid falling inflation has dragged on domestic demand, creating a divergent economy with rising risks to the vulnerable even as external demand remained robust,” she said.

—With assistance from Tomoko Sato.

(Updates with details from BOK statement)

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