[KH Explains] When will BOK pivot come?

Market sees end of rate hike cycle; central bank warns against ‘excessively’ dovish market expectation

BOK Governor Rhee Chang-yong presides over a Monetary Policy Board meeting held Tuesday. (Joint Press Corps)

Expectations on a base rate cut is growing as the Bank of Korea kept the benchmark rate steady for a second consecutive time Tuesday.

The central bank’s decision to hold the rate at 3.5 percent in light of the eased inflationary pressure strengthened market expectations that the BOK’s rate hike cycle has ended and a pivot on its rate stance could come soon.

Some even expect a rate cut to come within the year.

“The Bank of Korea's terminal rate will stand at 3.5 percent. It is likely to go for a rate fall in the end of 2023,” analyst Ahn Ye-ha from Kiwoom Securities projected, on the grounds that inflation will continue to wane out throughout the year.

“International oil prices will not jump due to lower demand (despite the production cut from OPEC+), while the downward trend of prices is likely to continue,” Ahn said.

“In the second half of this year, the BOK will keep its focus on the slow economy and financial instability.”

Others are sure of a rate freeze throughout the year, yet remain uncertain about a rate cut.

“A rate cut will happen when the consumer inflation falls below 3 percent, giving assurance it will even go down to 2 percent, the target level set by the BOK,” analyst Kim Ji-man from Samsung Securities said.

In March, consumer prices slowed to 4.2 percent on-year, compared with 4.8 percent in February.

“It is unlikely that BOK will go for a rate cut this year. If at the earliest, it will happen in the first quarter of next year,” Kim said.

Analyst Lim Jae-kyun from KB Securities agreed.

“The Bank of Korea stressed it prioritizes price stabilization. It said it will respond to the side effects of (price stabilization) such as financial crises through liquidity provision (not with a rate cut),” Lim said, drawing a line on expectations that the central bank may cut rates in light of events that shocked financial markets, such as the Silicon Valley Bank and Credit Suisse collapses.

“The BOK is likely to freeze the rate throughout the year. If it considers a rate cut within the year, it will be for the last rate-setting meeting of the year in November,” Lim said.

The BOK pushed back on the financial market’s dovish expectations for an early pivot in its press briefing held Tuesday.

“Most board members assessed the market expectation of a rate cut happening within the year as excessive,” BOK Gov. Rhee Chang-yong said, adding the members deem the fall in the yields of 91-day monetary stabilization bond and other state bonds to be "abnormal."

"The members view that it is not yet time to consider a rate cut, seeing the uncertainties are high in prices and more," Rhee said.

Additionally, the central bank is pressured by the gap of differentials between the key rates of Korea and US. The gap, currently at 1.5 percentage points, could move up to an unprecedented figure of 1.75 percentage points if the US Federal Reserve goes for a 25 basis point hike in early May.

Though Rhee has repeatedly stressed Korea’s base rate does not “mechanically” follow that of the US, experts believe the BOK will not likely start a pivot before the Fed over concerns of capital outflow and currency volatility.

The Fed is yet to show a sign of a pivot though it took a step back in its aggressive monetary tightening policy last month with a 25 basis point raise. CME Group's FedWatch Tool indicated a 69.5 percent chance the Fed will raise rates by a quarter point next month as of Wednesday.

"The Fed has been ruling out the possibility of a pivot. It will be difficult for the BOK to call for a pivot in its rate stance earlier than the Fed," analyst Min Ji-hee from Mirae Asset Securities said.

"The base rate will stand at 3.5 percent until the Fed changes its stance."

By Im Eun-byel(silverstar@heraldcorp.com)