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Conditions ripening for policy pivot amid moderating inflation: BOK chief

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Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a press conference at the BOK headquarters in Jung District, Seoul, Thursday. Yonhap

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a press conference at the BOK headquarters in Jung District, Seoul, Thursday. Yonhap

Korea's central bank chief said Thursday the trend of slowing inflation has been in place, and conditions ripened for a monetary policy reversal at an appropriate time, warning that market expectations over a potential rate cut seem to be somewhat excessive.

In a widely expected decision, the monetary policy board of the Bank of Korea (BOK) kept its policy rate unchanged at 3.5 percent for the 12th consecutive session amid moderating inflation.

"There has been progress in the trend of price stabilization, and things are for a timely turn (in the monetary policy)," BOK Gov. Rhee Chang-yong said in the press conference.

"But there are still risky factors, such as foreign exchange markets, home prices in Seoul and household debts. It is still uncertain when a policy reversal will take place, and it may take a longer time (for that)." he said.

The BOK has continued to stand pat following rate freezes since February last year after delivering seven consecutive rate hikes from April 2022 to January 2023.

The rate freeze came as household debt runs high despite an extended restrictive mode and inflationary pressure in Asia's fourth-largest economy showing signs of easing, while the country's economy is expected to grow faster than expected this year on the back of robust exports.

The BOK said while maintaining a restrictive monetary policy stance for a sufficient period of time, it will assess the timing of a rate cut.

Rhee said two board members expect the door to be opened for a potential rate cut within three months.

"Market expectations for a potential rate cut are somewhat excessive," Rhee said. "The central bank will review the timing of any rate cut in consideration of currency rates, household debt and real estate prices."

Household loans extended by banks in Korea rose for the third consecutive month in June, led by a rise in mortgage loan growth, which makes the central bank remain cautious about cutting the rates.

"Housing prices in Seoul and its surrounding areas have increased at a faster pace, and the downward trend in the rest of the country has continued," the BOK said.

Rhee expressed concerns over a faster-than-expected rise in home prices in Seoul and the wider Seoul area.

"The advance in home prices in the greater Seoul area is faster than expected ... I take it more seriously than before," he said.

A woman shops lettuce at a supermarket in Seoul, July 7. Yonhap

A woman shops lettuce at a supermarket in Seoul, July 7. Yonhap

The governor said earlier this week that the country is expected to see a gradual easing of inflation.

Consumer prices rose 2.4 percent on-year in June, the lowest level since July 2023, and the central bank is expecting inflation to fall further down the road, reaching its mid- to long-haul target rate of 2 percent by the end of this year.

The country continued to experience high inflationary pressure last year following the sharpest inflation in decades in 2022.

"Consumer price inflation is likely to modestly decline to the lower 2 percent range, and it is judged that it could be slightly lower than the May forecast of 2.6 percent for the year," the bank said.

The rate freeze also came as the central bank heightened its growth projection for the year.

In May, the central bank jacked up its growth estimate to 2.5 percent for the year, up from its earlier projection of 2.1 percent, but slashed the 2025 growth outlook to 2.1 percent from 2.3 percent. The bank kept its inflation outlook at 2.6 percent for the year.

Korea's economy grew at a higher-than-expected rate of 1.3 percent in the first quarter of the year, aided by a continued recovery in exports and a rise in construction investment.

The first-quarter expansion beat the market estimate of 0.6 percent and the 0.6 percent on-quarter expansion in the September-December period.

The reading marks the highest since the fourth quarter of 2021, when the economy expanded 1.4 percent.

Last year, the economy expanded 1.4 percent, slowing from the previous year's 2.6 percent gain and the 4.1 percent advance in 2021.

The central bank's rate freeze followed the Federal Reserve's decision last month to hold its benchmark lending rate steady at between 5.25 percent and 5.50 percent for the seventh consecutive time.

Amid easing inflationary pressure, the Fed is expected to start slashing the rate in September. (Yonhap)


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