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Korea Monetary Policy May 2022

Korea: BOK holds fire for third consecutive meeting in May

At its meeting on 25 May, the Bank of Korea (BOK) kept the base rate unchanged at 3.50% for the third consecutive meeting. The decision was unanimous and matched market expectations.

Concurrent with its policy decision, the BOK updated its economic outlook. The Bank expects inflation to fall more markedly in 2024, to 2.4% instead of the 2.6% it predicted in February. As a result, the BOK felt that the base rate was sufficiently high to bring inflation to its 2.0% target in the medium-run. Meanwhile, the BOK lowered its GDP forecast for 2023 to 1.4% (February: 1.6%) and 2024 to 2.3% (February: 2.4%), leading it to forgo hiking the base rate further to avoid hurting the already-weak economy.

During a press briefing, BOK governor Rhee said that the market “shouldn’t think the BOK is absolutely over with rate hikes”. There are certainly risks to the outlook for monetary policy, with sticky core inflation—which remained frozen at 4.0% in April—in particular focus, as well as oil prices and the strength of the global economy. Nonetheless, none of the 17 panelists polled by FocusEconomics expect the Bank to hike again this year. Instead, 10 expect the BOK to lower rates by the end of the year, with most expecting a 25 basis point cut in Q4.

The next BOK meeting is scheduled for 13 July.

Analysts at Nomura said:

“We maintain our view that the hiking cycle has ended despite the BOK’s hawkish signal. We believe worsening growth conditions will likely discourage the BOK from maintaining a hawkish stance. We expect a policy pivot in Q3, as we expect worsening growth conditions to push the economy into a recession in H2, in contrast with the BOK’s expectations of a H2 recovery.”

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