South Korean Central Bank Keeps Interest Rates High to Comabat Inflation

South Korea's central bank maintained its interest rates at a 15-year high on Apr 12, as persistent inflation and robust export growth provided policymakers with reasons to refrain from easing monetary policy. At the policy review held in Seoul, the Bank of Korea (BOK) kept its key rate unchanged at 3.50 per cent, marking the 10th consecutive meeting without a change, in line with the expectations of all 39 analysts surveyed by Reuters.

The BOK has underscored the need for further progress on inflation to build confidence that it is moving towards the central bank's 2 per cent target before considering a reduction in borrowing costs. However, departing board member Suh Young-kyung, known for her hawkish stance on inflation, suggested on Mar 26 that it might be time to "normalise" interest rates.

The consumer price index (CPI) registered a 3.1 per cent increase in March year-on-year, maintaining the same pace as February after three months of moderation. This trend suggests that it is still premature for the BOK to contemplate easing. Exports continued to rise for the sixth consecutive month, primarily driven by robust sales of chips, further reinforcing the rationale for the BOK to maintain high interest rates.

"Rising exports and stabilising consumer sentiment have provided policymakers with room to adopt a wait-and-see approach. Additionally, the risks associated with the potential delay in the Fed's easing cycle imply that the BOK is likely to exercise patience," explained Kim Jin-wook, an economist at Citigroup.

Analysts anticipate that the BOK will implement a 25 basis-point reduction in both the third and fourth quarters, lowering the benchmark rate to 3.00 per cent by the end of this year from its current 3.50 per cent. Investors are keenly observing the selection of replacements for two departing voting board members, Cho Yoon-Je and Suh, whose four-year terms are set to conclude on Apr 20.