MNI BOK WATCH: Board Holds On Mixed Economic Data

The Bank of Korea will maintain a wait-and-see stance for now as it weighs upside risks to inflation against downside risks to growth, said Governor Rhee Chang-yong Friday following the Board's unanimous decision to hold the base rate at 2.5%. 

Rhee, delivering his last base rate call, said the Board will make policy decisions while closely tracking domestic and external developments, including the war in the Middle East, and assessing their impact on inflation, growth, and financial stability, following the largely expected call. (See MNI BOK WATCH: Board Likely To Hold, Inflation In Focus) The hold is the board's seventh consecutive pause.

“This decision was not simply to defer policy action due to heightened uncertainty, but to more closely assess the evolution of the war in the Middle East and its spillover effects in determining the policy direction,” Rhee noted. 

Future decisions will be based on additional information on the conflict and incoming economic indicators, with the Board assessing the size and persistence of its impact on inflation and growth, he added. External conditions have changed significantly following the outbreak of the Middle East conflict shortly after the February Monetary Policy Board meeting, he continued. 

GLOBAL UNCERTAINTY

The BOK's statement following the Board's decision noted the domestic economy now faces both higher inflation risks and weaker growth prospects due to the Iran conflict, while uncertainty in the outlook remains elevated.

It added that there is a high degree of uncertainty around developments in the Middle East, alongside rising inflation pressures, increasing downside risks to growth, and heightened volatility in financial and foreign exchange markets.

The Board judged it appropriate to keep the base rate unchanged while assessing the evolution of the conflict and its economic impact, the statement added.

HIGHER INFLATION

Rhee noted inflation this year is now expected to exceed the February forecast of 2.2%, rising to the mid- to upper-2% range, while core inflation is also likely to be higher than the previous 2.1% projection as global oil prices push up costs, though government price stabilisation measures are expected to partially offset the pressure. However, he noted uncertainty around the inflation path remains elevated, driven by oil prices, exchange rates, policy measures, and cost pass-through effects.

Domestic growth is also expected to slow due to higher energy prices and supply constraints, though strong semiconductor exports and fiscal support are expected to cushion the impact. He added that full-year growth is now projected to come in below the February forecast of 2.0%, with the outlook dependent on Middle East developments, trade conditions, the semiconductor cycle, and domestic demand recovery.

Separately, the Asian Development Bank on Friday raised its South Korea GDP growth forecast to 1.9%, up from 1.7% in December, and lifted its inflation forecast to 2.3% from 2.1%.