SEOUL, April 6 (AJP) — There is little doubt the Bank of Korea will hold its base rate at 2.5 percent at Thursday’s rate-setting meeting, but how long the pause lasts will be closely watched as Gulf-driven import inflation builds the case for at least one hike down the line.
The post-meeting narrative is also unlikely to surprise, as this will be the last meeting under Governor Rhee Chang-yong before his four-year term ends on April 20.
Markets are instead looking ahead to the May 28 meeting, to be chaired by incoming governor Shin Hyun-song, a U.K.-educated former Bank for International Settlements economist, when the central bank is expected to update its growth and inflation outlook to reflect the war’s impact.
Government bond yields, which have risen 60 to 70 basis points this year, have eased from recent highs on expectations that Gulf tensions may stabilize.
The three-year government bond yield on Monday fell 1.6 basis points to 3.451 percent, retreating from a recent peak of 3.617 percent. The 10-year yield dropped 2.2 basis points to 3.725 percent, also down from 3.915 percent.
“The BOK is expected to keep the base rate unchanged at the April meeting,” said Baek Yoon-min, a senior research fellow at Kyobo Securities. “We expect the blockade of the Strait of Hormuz to ease or conclude within the second quarter.”
Baek pointed to elevated U.S. inflation ahead of the November midterm elections as a key variable. Average gasoline prices have risen above $4 per gallon, the highest since August 2022.
According to the Federal Reserve Bank of Cleveland, headline inflation in early April accelerated to 3.7 percent from 3.25 percent in March. Baek said U.S. inflation may paradoxically ease pressure on South Korea to tighten policy.
Yoon Yeo-sam, a researcher at Meritz Securities, also expects the BOK to remain on hold for now, citing weak domestic conditions.
“In 2022, core domestic indicators were robust. Now, the situation is different,” Yoon said.
Economists expect rate hikes later in the year as import price pressures feed through.
Consumer prices in Korea rose 2.2 percent in March from a year earlier, accelerating from 2.0 percent in the previous two months. While still within the BOK’s target range, the composition signals rising pressure.
Energy has re-emerged as the dominant driver, compounded by a structurally weaker won, with the full impact only beginning to filter through.
The won has extended its slide, weakening a further 6 percent this year amid capital outflows. The dollar has also sharply eased from recent peak of 1,530 won to 1,500 won Monday, but still remains at the levels of March 2009 during the global financial crisis,
Petroleum prices surged 9.9 percent, contributing 0.39 percentage point to headline inflation. Diesel jumped 17 percent and gasoline 8 percent, marking the strongest energy impulse since the early phase of the Ukraine war.
March likely captures only the initial shock. The key transmission channels — oil, the dollar and the exchange rate — have yet to fully feed into domestic prices.
Despite his near-term hold view, Baek warned the impact of oil on inflation could be “longer and stickier” than expected, with spillovers into petrochemicals such as plastics and asphalt.
He added that Shin’s appointment raises the likelihood of a shift toward tighter policy, noting the incoming governor’s preference for preemptive rate hikes.
Cho Yong-gu, a research fellow at Shinyoung Securities, expects consumer inflation to approach 3 percent between May and August, with gradual tightening potentially beginning as early as July.
"The central bank lacks the tools to stabilize prices quickly without a rate hike," Cho added.
Some academics argue that tightening may be needed to address broader imbalances.
“Given the quadruple high phenomenon of exchange rates, prices, housing costs, and interest rates, a modest rate hike is advisable,” said Kim Jung-sik, a professor emeritus at Yonsei University. “The benefits of absorbing excess liquidity to stabilize these four factors outweigh the costs.”
As of Monday, the upper bound for mixed-rate mortgage loans at major banks has exceeded 7 percent. The M2 money supply rose 5.8 percent year-on-year in January, continuing to outpace the OECD average of 3 to 4 percent.
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