Bank of Korea stands pat but warns against rate cut bets

The logo of the Bank of Korea is seen in Seoul

By Choonsik Yoo and Jihoon Lee

SEOUL (Reuters) -South Korea’s central bank on Thursday flagged it may not be done tightening, sending bond yields soaring, after it held rates steady for a third straight meeting and trimmed this year’s economic growth forecast.

The Bank of Korea’s monetary policy board unanimously voted to keep its policy rate unchanged at 3.50%, in a decision matching the view of economists surveyed by Reuters.

It trimmed this year’s economic growth forecast to 1.4% from the previous 1.6%, while keeping its inflation projection unchanged at 3.5%.

Governor Rhee Chang-yong, however, issued some hawkish comments on the future policy stance challenging market expectations.

“(The board will) make decisions depending on inflation and other data, and let me request you not to think that we will never be able to raise the rates,” Rhee told reporters, pointing to a stunning rate hike this month by Australia’s central bank.

Bond yields soared, with the shorter-term yields rising more sharply than longer-term ones, as Rhee’s comments prompted investors to cut back bets that the Bank of Korea would not raise rates further but start cutting them this year.

The three-year treasury bond yield rose as much as 12.5 basis points to 3.496% and the 10-year yield by 9.7 basis points to 3.597%.

“Some of his comments were indeed hawkish, but the overall conditions have not changed so much as to revise my views that the central bank may have to cut the rate later this year,” said Paik Yoon-min, fixed-income analyst at Kyobo Securities.

Most of the economists surveyed by Reuters ahead of Thursday’s meeting had forecast the next rate change would be a cut, probably during the final quarter of this year.

The Bank of Korea started raising interest rates in August 2021 to tame inflation, well before the world’s other major central banks, and had raised them by a total of 300 basis points through January this year.

Asia’s fourth-largest economy has cooled on sluggish exports and narrowly averted recession in the first quarter. Inflation has slowed since peaking in July last year but still stands far above the central bank’s 2% target.

(Reporting by Choonsik Yoo and Jihoon Lee; Editing by Sonali Paul)