BOK's rate policy back to square one after GDP, Fed comments

TBILISI, Georgia – The Bank of Korea (BOK) will go back to square one on monetary policy as stronger-than-expected economic growth in the first quarter and delayed rate cuts in the US may make the factors it had closely monitored before a rate move not worthy of consideration, its governor said on Thursday.

BOK Governor Rhee Chang-yong told reporters that Korea's first-quarter economic growth surprised him and he needed to examine whether the factors that drove the gross domestic product expansion would be short-lived or not.

His remarks followed the US Federal Reserve Chair Jerome Powell’s statement on Wednesday, in which he further dashed hopes for imminent rate cuts.

“The consensus view is now that the timing of rate cuts has been delayed given robust US economic growth and (rising) inflation,” Rhee said on the sidelines of the Asia Development Bank’s annual conference in Tbilisi, Georgia.

“The preconditions we had monitored for monetary policy until last month have all changed,” he said, adding it may need to rethink the course of action it had expected to take.

The BOK had been widely expected to slash interest rates in the second half of this year in line with the Federal Reserve’s prospective rate cut from the 5.25-5.50% range later this year.

Rhee said its rate-setting meeting last month took into consideration the signs of the Fed pivoting toward loosening. However, now the situation has changed, the factors it reviewed during the April meeting would unlikely work for its new policy decisions.

The statement released after the April monetary policy meeting reinforced expectations for a rate cut in the second half of this year.

The South Korean central bank has maintained its policy rate at its lowest level in more than 14 years of 3.5% after it hiked the rate to the current level in January 2023.

STRONG DOMESTIC DEMAND

Asia’s No. 4 economy advanced 1.3% in the first quarter from the preceding three months, its sharpest quarterly expansion.

It led the Organisation for Economic and Co-operation and Development to revise up its forecast for South Korea’s 2024 GDP growth to 2.6% from its earlier projection of 2.2%. 

“We had expected exports fared well, but domestic demand came out stronger than expected,” Rhee said.

In response to questions about the dip in April inflation to 2.9% from 3.1% in March, he dismissed it as just a slight change and not meaningful.

He cited mounting geopolitical risks in the Middle East as upward pressures on oil prices and foreign exchange rates.

It will release its revision to economic growth and inflation on May 23.

On Wednesday, the Fed said its rate-setting committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward its 2% target, according to a CNBC report.

It noted “a lack of further progress” in getting inflation back down to its 2% target.

NEW RATE-SETTING COMMITTEE MEMBERS

Adding uncertainty to the direction of BOK’s monetary policy, it has appointed two new members of its seven-member monetary policy committee – Lee Soo-hyung, a professor at the Graduate School of International Studies of Seoul National University and Kim Jong-hwa, a former deputy governor of the BOK.

They will join the committee meetings from this month scheduled on May 23 after their predecessors’ terms ended late last month.

Write to Jin-Kyu Kang at joseph@hankyung.com
Yeonhee Kim edited this article.