Bank of Korea Governor Says It's Too Early to Discuss Rate Cuts

South Korea - Bank of Korea Governor Rhee Chang-yong has stated that it is too early to begin discussing rate cuts, despite the central bank being among the first to pause its tightening cycle. This has led to market speculation about potential rate cuts, but Rhee believes these expectations are "premature."

During the Asian Development Bank's annual meeting in Incheon, Rhee commented on South Korea's economic landscape, highlighting that the country's core inflation remains well above the target rate. While inflation has shown a decline, falling below 4% in April, Rhee emphasized that the current figures still warrant a cautious approach. He suggested that it is necessary to closely monitor the economic situation before considering any changes to the central bank's policies.

Rhee's comments follow the recent report that South Korea's inflation reached a 14-month low of 3.7%, while still exceeding the central bank's 2% target. The Bank of Korea paused interest rate hikes in the last two meetings after increasing rates by 300 basis points within 1.5 years, a swift pace. Rhee believes it's an appropriate time to evaluate the accumulated impact of this rapid increase.

Some Wall Street banks, including Citi, predict that South Korea could start a rate-cutting cycle as early as the third quarter, with headline consumer price index readings anticipated to decrease further. Citi economists Jiuk Choi and Jin-wook Kim expect headline CPI to drop to early-mid 3% YoY levels in May 2023 and 2% YoY levels in June 2023, potentially initiating a rate-cutting cycle from Q3 2023.

Regarding inflation, the Bank of Korea governor noted that global inflation levels appear to have peaked, despite persisting stickiness in core readings. He suggested that the tightening cycle in advanced economies is likely nearing its end, as rapid hikes cannot continue due to financial stability issues in the US and Europe.

Rhee also mentioned that the banking crisis in the West has had a limited impact on South Korea and that the foreign exchange rate for the South Korean currency is not a concern. He emphasized the need to be cautious of significant volatility, as the currency has traditionally experienced pressure on dividend payouts for foreign investors in April.

On Wednesday, the South Korean won reached 1,340.77 against the US dollar, marking its weakest level since November.