MNI BOK WATCH: Board On Hold, Drops Rate Cut Reference

Bank of Korea Governor Rhee Chang-yong on Thursday signalled that the central bank has effectively paused its rate-cut cycle, citing concerns that a weak currency could fuel inflation, after the bank removed explicit references to future rate reductions in an effort to limit further won depreciation, following the board's unanimous decision to hold the Base Rate at 2.5%. 

The board's largely expected decision represents its fifth consecutive pause, reflecting growing concern over the inflationary impact of currency weakness and ongoing financial stability risks. (See MNI BOK WATCH: Board Likely To Hold, Offer Forward Guidance)

The governor said that the risks to financial stability remain. “The Board, therefore, judged that it is appropriate to maintain the current level of the Base Rate while assessing developments in the domestic and external policy environments," Rhee noted. Unlike previous statements, he made no reference to the possibility of further rate cuts.

CUTS CUT

At the prior meeting, the bank had said it would “decide whether and when to implement any further Base Rate cuts” after assessing growth, inflation and financial stability. (See MNI BOK WATCH: Board Holds, Further Cuts Considered Cautiously)

Rhee said five board members saw rates remaining steady over the next three months, while one favoured keeping the door open to a cut. He also noted that foreign exchange developments were a major factor behind the decision.

In its statement, the BOK said it would continue to conduct monetary policy to stabilise inflation over the medium term while paying close attention to financial stability, adding that it saw no imminent need to ease further as “the domestic economy has continued on an improving growth trend, with upside risks to the growth path having increased somewhat.”

Rhee warned that while inflation is expected to gradually decline, the elevated exchange rate remains a source of upside risk. He also said financial stability risks persist, particularly from housing prices in Seoul and surrounding areas, rising household debt and heightened exchange rate volatility.

The bank echoed those concerns, stressing the need for vigilance even as inflation trends toward its target, noting that exchange rate movements could continue to pose upside risks to prices.