By Cynthia Kim and Jihoon Lee
SEOUL, May 28 (Reuters) – The Bank of Korea kept its benchmark interest rate unchanged on Thursday to gauge whether the Iran war will damp growth, even as a slumping won and stubborn inflation pressure policymakers to tighten monetary policy in the coming months.
The seven-member monetary policy board at the central bank voted to keep its benchmark interest rate unchanged at 2.50%, as expected by 30 of 32 economists polled by Reuters. The two outliers forecast a rate rise.
The central bank also revised up this year’s inflation estimate to 2.7% from the 2.2% projected before the Iran war started, factoring in the spillovers from rising oil prices. It raised this year’s growth forecast to 2.6% from 2.0% previously, reflecting the robust first-quarter expansion of 1.7%, the fastest in nearly six years.
The hold reflects a cautious approach by the bank’s new Governor Shin Hyun Song, who is due to give his first news conference at 0210 GMT to communicate whether the central bank is ready to take interest rates higher as inflationary pressures broaden further.
“We expect the BOK will hike its policy rate to 2.75% at the next meeting in July, followed by another rate hike in October, pushing the rate towards 3.00% by the end of the year,” said Stephen Lee, an economist at Meritz Securities in Seoul.
“Inflation figures are not high but the positive output gap, rising inflation expectations, and rising housing prices will be main reasons behind the hikes.”
Headline inflation is breaching the central bank’s 2% target with the 2.6% April rate marking the fastest gain in almost two years.
A weakening won, down 4.5% this year against the dollar, is also effectively bringing inflation into domestic supermarkets and factories, adding further price pressure for a nation dependent on Middle Eastern energy imports.
An insatiable global appetite for semiconductors is drumming up the nation’s phenomenal export cycle, helping to almost double the benchmark KOSPI this year and generating spillover benefits for local suppliers and factories.
Markets have been wagering on a hike.
Around two-thirds of the economists polled predicted at least one rate hike by end-September, a sharp shift from last month’s survey, when only three of 30 economists expected a quarter-point hike.
(Reporting by Cynthia Kim, Jihoon Lee; Editing by Sam Holmes)
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