Rates likely to be frozen for months, BOK says

The chance of any further rate increases has grown weak as the rate is already high and inflation is slowly yet continuously easing, said the Bank of Korea (BOK) as it kept the interest rate steady at 3.50 percent.

Bank of Korea Gov. Rhee Chang-yong speaks to reporters on Thursday after the Monetary Policy Board kept the rates unchanged at 3.50 percent for the eighth consecutive meeting. [YONHAP]

The chance of any further rate increases has grown weak as the rate is already high and inflation is slowly yet continuously easing, said the Bank of Korea (BOK) as it kept the interest rate steady at 3.50 percent.

“The need for an additional rate increase has been reduced as inflation continues to slow and risks related to international oil prices and overseas risks like the Middle East [crisis] have been alleviated,” said BOK Gov. Rhee Chang-yong at a press conference held in central Seoul following the rate-setting meeting on Thursday.

The BOK’s Monetary Policy Board held interest rates unchanged for the eighth straight meeting, standing firm since January last year. It was a unanimous decision.

The board is not considering a rate cut any time soon.

“The five Monetary Policy Board members agreed to keep the interest rate at 3.50 percent over the next three months,” meaning the current rate represents the peak.

But Rhee warned against rate cuts any time soon.

“I personally think cutting the interest rate will not be easy for at least six months or more.”

Rhee said that a hasty rate cut could trigger inflation expectations, which could push up inflation.

“Under the current circumstance, a premature rate cut could result in the bigger side effect of stimulating an expectation for property price increases rather than having the [positive] effect of boosting the economy.”

Consumer prices grew 3.2 percent on year in December, slowing from 3.3 percent in November. The growth has been generally slowing since it peaked at 6.3 percent in July last year.

However, analysts project the BOK to start slashing rates as early as the second quarter.

“We maintain the projection that the Monetary Policy Board will start cutting rates from the second quarter,” said Min Ji-hee, an analyst at Mirae Asset Securities. “Disinflation is estimated to continue in Korea and the path of the board’s rate decline is highly likely to be affected by the timing of the Fed’s pivot.”

Mirae expects a three percentage point rate cut this year.

The chance of debt issues at Taeyoung Engineering & Construction (E&C), a mid-sized builder, spreading into a systematic risk in the property or construction sectors is weak as the problem was caused by the builder’s ill management of its debt, Rhee said.

“The BOK will play its role to stabilize the market if real estate project financing (PF) loans trigger any market uncertainties, but now isn’t the right situation [to act],” said Rhee.

Cash-strapped Taeyoung E&C applied for a debt restructuring program in December due to a liquidity shortage over real estate PF loans, which are short-term debts taken out by a builder to finance real estate development projects.

The BOK’s Thursday decision was a widely expected move by bond experts.

According to the Korea Financial Investment Association (Kofia), 98 percent of bond experts, including analysts, expected the BOK’s Monetary Policy Board to freeze the rate. The gauge was up from a 90 percent estimation ahead of the previous rate-setting meeting in November. The remaining 2 percent projected a 25 basis points rate cut.

A total of 100 people from 53 institutions took part in the survey.

BY JIN MIN-JI [jin.minji@joongang.co.kr]