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Bank of Korea weighs rate cut timing as it delivers dovish hold

Published 07/10/2024, 08:55 PM
Updated 07/11/2024, 12:10 AM
© Reuters. FILE PHOTO: People walk on a zebra crossing in front of the buliding of Bank of Korea in Seoul, South Korea, July 14, 2016.  REUTERS/Kim Hong-Ji/File Photo

By Cynthia Kim and Jihoon Lee

SEOUL (Reuters) -South Korea's central bank said it was time to prepare for a pivot to interest rate cuts but more evidence is needed to strengthen confidence that inflation is returning to its 2% target, after it left a key policy rate unchanged on Thursday.

The Bank of Korea "will examine the timing of a rate cut," it said in a policy statement after leaving the benchmark interest rate steady at 3.50% for the 12th straight meeting, as widely expected by all 40 economists surveyed by Reuters.

"Given the underlying uncertainties regarding the future path of inflation, however, it is necessary to further assess whether inflation will continue its slowing trend."

While Thursday's decision to leave rates unchanged was unanimous, two of the central bank's seven board members said they may support a reduction in the policy rate within the next three months, according to Governor Rhee Chang-yong.

Rhee, speaking at a post-policy news conference, sounded a note of caution on growing expectations for interest rate cuts.

"In terms of price stability alone, the mood is right to discuss interest rate cuts," Rhee said, but "market expectations (for rate cuts) does look excessive in some ways."

Expectations the BOK could cut interest rates in the coming months gained momentum after headline consumer price readings for June released last week showed inflation slowed to an 11-month low of 2.4%, close to its target of 2%.

In a crucial change, the BOK dropped the phrase from its May statement that "upside risks to inflation forecasts have increased."

South Korea's policy-sensitive three-year treasury bond futures fell 0.18 point to 105.230 as of 0321 GMT.

Asia's fourth-largest economy is confronting sticky inflation and policymakers are waiting for sufficient evidence that prices are cooling to begin lowering borrowing costs from restrictive levels.

Policymakers are worried about a re-acceleration in morgtage loan growth as South Korea has the developed world's highest household debt-to-GDP ratio.

Analysts say a wobbly won, down about 7% this year against the dollar, can also potentially push back the timetable for interest rate relief, even as political pressure grows for early rate cuts.

© Reuters. FILE PHOTO: People walk on a zebra crossing in front of the buliding of Bank of Korea in Seoul, South Korea, July 14, 2016.  REUTERS/Kim Hong-Ji/File Photo

"Looks like board members are now confident about achieving price stability, but assessed more attention should be paid to financial stability, given the bank's dual mandate: price stability and financial stability," said Ahn Jae-kyun, an analyst at Shinhan Securities.

"We might see dissenters in the bank's next policy review (in August), it will be a way to show that policymakers thoroughly examined risks involved with rate cuts," said Ahn, who expects the BOK to deliver a cut in the fourth quarter.

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