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Korea Monetary Policy February 2022

Korea: BOK keeps rates unchanged and suggests end to hiking cycle in February

At its meeting on 23 February, the Bank of Korea (BOK) kept the base rate unchanged at 3.50%. The decision matched market expectations. One member of the monetary policy board voted for a 25 basis point hike.

The move was prompted by the BOK’s recent forecasts, which suggest that inflation will gradually move to target in the medium run. In addition, the BOK highlighted the high degree of uncertainty regarding the impact of recent rate hikes on economic activity.

Meanwhile, the BOK revised down its GDP growth and inflation forecasts for this year by 0.1 percentage points each, to 1.6% and 3.5%, respectively.

During a press briefing, BOK governor Rhee said that no further rate hikes would be required if inflation ahead falls at a rate equal to or greater than that forecast by the BOK. That said, he also refused to rule out further rate hikes if inflation is more persistent than expected, saying that “when you are at the wheel and your vision is blocked by a thick fog, you stop and wait for the fog to clear. That is the decision facing us, so it’s time to stop and wait.”

11 out of 21 panelists polled by FocusEconomics do not expect further rate rises ahead, while three expect no more than 25 basis points of additional hikes by the end of the year. The Consensus is for the BOK to reduce the policy rate by around 25 basis points by the end of 2023. Key risks to the monetary policy outlook are the Fed’s stance, the evolution of the won, continued instability in domestic financial markets and a sharper-than-expected economic slowdown.

The next BOK meeting is scheduled for 11 April.

Analysts at ANZ said:

“There remain significant uncertainties surrounding the policy rate trajectory, but we believe the bar is high for monetary policy settings to move further into restrictive territory, given the weak growth backdrop and softening demand conditions.”

ING’s Min Joo Kang expects a rate cut in Q4:

“We initially thought the BoK would start a rate cut cycle in the third quarter but considering the Fed’s terminal rate could go beyond 5.0% in the second quarter, we are revising our BoK policy outlook accordingly, postponing the first rate cut to the fourth quarter of 2023.”

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