BOK Rate Freeze Seen as More Solidified; Hike Expected in Latter Half

South Korea's central bank, the Bank of Korea (BOK), is increasingly likely to maintain its freeze on the base interest rate, a move influenced by the U.S. Federal Reserve's recent decision to hold its policy rate steady. This stance reflects a complex economic landscape where both raising and lowering rates presents significant challenges. The nation's monetary policymakers are navigating a delicate balance, contending with global economic uncertainties stemming from the Middle East conflict and the inflationary pressures driven by soaring international oil prices.

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The uncertainty of the future U.S. monetary policy path has further increased due to significant differences in opinion within the Fed and the emphasis on inflation due to rising oil prices.

Following the U.S. Federal Open Market Committee's (FOMC) decision to maintain the federal funds rate at 3.50-3.75%, the BOK convened a meeting to assess the potential impact on domestic financial and foreign exchange markets. Deputy Governor Yoo Sang-dae noted that the divergence in opinions within the Fed and the emphasis on inflation due to rising oil prices have heightened uncertainty surrounding future U.S. monetary policy. He stressed the need for vigilance regarding external risks, particularly the prolonged Middle East conflict, and readiness to respond as necessary.

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We will closely monitor the development of domestic and external risk factors and respond in a timely manner if necessary.

Domestically, the consensus among financial market participants and BOK Monetary Policy Board members has been leaning towards a continued rate freeze. The BOK's decision in early April to hold the rate at 2.50% for the seventh consecutive time was unanimous, with board members largely agreeing on the need to monitor the impact of the Middle East conflict. The upcoming Monetary Policy Committee meeting, presided over by the new BOK Governor Shin Hyun-song, is widely expected to result in another freeze. Governor Shin has emphasized a "prudent and flexible monetary policy" approach. While rate cuts seem less likely due to inflation concerns, analysts like Kim Jin-sung of Heungkuk Securities suggest that a period of neutral monetary policy is probable. However, looking ahead, a growing number of analysts, including Choi Ji-wook of Korea Investment & Securities, predict a rate hike in the latter half of the year. This outlook is driven by persistent inflation, a high won-dollar exchange rate, and the need to manage household debt and ensure a soft landing for the real estate market. Choi forecasts two 0.25% point hikes, bringing the base rate to 3.00%, arguing that even with such increases, the impact on the real economy and financial conditions would be manageable given the current accommodative financial environment.

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The key is the war, with risks to both inflation and growth looming.