S.Korean central bank holds rates steady, may not resume tightening

By Choonsik Yoo and Jihoon Lee

SEOUL (Reuters) -South Korea’s central bank held interest rates steady on Thursday and said the monetary tightening campaign it began 18 months ago would not resume if inflation followed an expected path towards moderation.

It was time to stop and watch until the uncertainties were resolved, Bank of Korea Governor Rhee Chang-yong told reporters after the central bank left its policy interest rate unchanged at 3.50%.

Rhee would not rule out the possibility of further increases but repeatedly said no more upward moves would be needed if the annual inflation rate eased towards a forecast 3% by the end of the year.

Consumer prices in February were 5.2% higher than a year earlier, compared with a peak annual rate of 6.3% seen in July.

“When you are at the wheel and your vision is blocked by thick fog, you stop and wait for the fog to clear,” Rhee said. “That is the situation facing us, so it’s time to stop and wait.”

The central bank’s decision on the policy rate was line with a unanimous expectation by the 42 economists in a Reuters poll.

Share prices rose following the announcement, also helped higher by a rebound in U.S. stock index futures. The won was stronger, too.

Daishin Securities economist Kong Dong-rak said Rhee’s comments appeared to be aimed at reminding markets that the outlook was uncertain.

“I think his intention was to give a sense of tension about the prospects for policy, dissuading investors from betting too much on a cut,” Kong said.

The central bank also slightly revised its economic forecasts. It now sees full-year 2023 gross domestic product rising 1.6% from last year, compared with its November forecast of 1.7%. Average consumer prices in 2023 will be 3.5% higher than last year, it said. It previously expected a 3.6% rise.

The board’s decision on monetary policy was the first since Feb. 24 last year in which it had left the policy rate unchanged. It came amid signs of economic growth losing momentum, mainly on falling exports.

On Thursday, President Yoon Suk-yeol convened a meeting of economy ministers and told them to do whatever they could to avert a widely expected decline in 2023 exports.

The tightening cycle began in August 2021 and has totalled 300 basis points in interest rate rises. Most economists in the same Reuters survey saw the cycle as having ended.

The survey had also suggested the policy rate would remain unchanged throughout 2023.

(Reporting by Choonsik Yoo and Jihoon Lee; Editing by Bradley Perrett)