Korea: BoK keeps rates at all-time low in May
May 27, 2021
At its meeting on 27 May, the Bank of Korea (BoK) kept the base rate at its record low of 0.50%, in line with market expectations.
The Bank’s decision to hold came amid robust activity at home—with a notable recovery in private consumption in Q1—and as the global economy continued to gain momentum. As such, the Bank upgraded its 2021 GDP growth projection from February’s estimate. However, a rate hike was not warranted yet, as although headline inflation surpassed the 2% target in April, core inflation remained notably lower, and there was still some uncertainty over the economic outlook.
In its forward guidance, the Bank struck a more hawkish tone, highlighting that headline inflation was likely to remain “at a high level for some time”. That said, the BoK still vowed to maintain its accommodative policy amid uncertainty surrounding the health crisis, while keeping a close eye on financial imbalances—namely asset market flows and household debt growth.
Looking at the policy outlook, panelists disagree over whether the first rate hike will take place this year or next, with Irene Choi and Goohoon Kwon, economists at Goldman Sachs, seeing a hike this year:
“While we keep our base case forecast of a November policy rate lift-off, today's meeting points to risks of an even earlier lift-off in October, possibly followed by another hike in February, in the absence of major disruptions to vaccination progress or economic re-opening.”
Meanwhile, Robert Carnell, regional head of research for Asia-Pacific at ING, doesn’t expect a rate hike until next year:
“I would say that the chances of a rate hike this year are pretty small. But next year is another matter. We do have some tightening priced in, though not much and we have pushed that into the second half of next year. Circumstances could bring that forward, though for now, it is a reasonable holding forecast, and in line with the consensus view.”
The next monetary policy meeting will be held on 15 July.
Author: Frederico Teixeira de Abreu, Junior Economist