Bank of Korea signals end to easing cycle after standing pat to safeguard FX stability
The logo of the Bank of Korea is seen in Seoul, South Korea, November 30, 2017. REUTERS/Kim Hong-Ji
SEOUL, Jan 15 : South Korea's central bank on Thursday signalled an end to its current easing cycle after keeping its benchmark interest rate unchanged, prioritising financial stability in its first policy meeting of the year as the won hovered around 16-year lows.
Geopolitical tensions and fund outflows have intensified risks to growth and stability in Asia's fourth-biggest economy, particularly as policymakers have struggled to slow a slide in the local currency.
"I can undeniably say that the forex market situation was an important factor in coming to today's (policy rate) decision," Governor Rhee Chang-yong said in a press conference after the bank's monetary policy board voted to keep the benchmark interest rate unchanged at 2.50 per cent.
"The FX rate stabilization measures (recently announced) bolstered the won by more than 40 won against the dollar but it is weakening again, so we need to stay on alert," the BOK chief said.
All 34 economists polled by Reuters had expected the bank to stand pat.
Having delivered 100 basis points of cumulative cuts since October 2024, Rhee has been signalling a prolonged pause in the current easing cycle amid geopolitical uncertainties and persistent fund outflow risks.
On Thursday, the BOK took a step further by dropping language from its previous statement when it said it would "decide whether and when to implement any further base rate cuts".
The hawkish move pushed the March futures on three-year treasury bonds down as much as 0.29 points to 105.05.
However, the won fell 0.6 per cent to 1,472.6 per dollar, underlining policymakers' concerns about the risks to financial stability from one-sided currency moves. The won had jumped 1 per cent on Wednesday after U.S. Treasury Secretary Scott Bessent said, in rare comments, that "excess volatility in the foreign exchange market is undesirable."
ANALYSTS ADJUST RATE CALLS AFTER HAWKISH SIGNAL
"Policy statements have been carrying language about needing further easing since July 2024, so removing of that today was hawkish," said Ahn Jae-kyun, an analyst at the Korea Investment Securities.
"So a rate cut within the next three months has been ruled out, I'm not sure if a cut could be delivered in the next six months. I expect a cut in the third quarter but can't be too sure about that."
Kang Seung-won, an analyst at NH Investment Securities, revised his rate call after the meeting and is now forecasting no change in 2026, from an earlier prediction of a 25 basis-point cut in the latter half of this year.
Kang, however, said that a shift to a rate-hold stance does not necessarily raise the possibility of rate hikes.
Policymakers so far have failed to stabilize the faltering won, one of Asia's worst performing currencies in the second half of last year, as appetite for U.S. equities among domestic retail investors remained strong.
Prior to the BOK's statement on Thursday, analysts had pushed back the next predicted cut to the first quarter of 2027 from the first quarter of this year, as they expect authorities' efforts to steady the won to continue amid unfavourable external conditions.
They expect headline inflation to average 1.9 per cent this year, slightly below the central bank's target of 2 per cent.
