By Cynthia Kim and Jihoon Lee
SEOUL, April 10 (Reuters) – South Korea’s central bank kept its policy interest rate steady on Friday and warned of a highly uncertain path ahead as a broadening conflict in the Middle East threatens to derail growth and worsen inflation.
The Bank of Korea flagged both the risk of a resurgent inflationary spiral fueled by crude prices and slower growth after the board voted to keep its benchmark interest rate unchanged at 2.50%.
All 31 economists polled by Reuters expected policy rates to remain on hold.
“If we look at the impact of supply-side shocks, it is much bigger for Asia especially Korea, Japan, and Taiwan and these shocks could widen,” Governor Rhee Chang-yong said at a news conference in Seoul, his last before his term ends on April 20. “Although we are responding to price risks by capping fuel prices, that is not a permanent measure, so inflation risks are growing should the (Middle East) situation drag on.”
In a statement, the BOK warned growth will likely fall short of its 2.0% February forecast, while headline inflation could “exceed considerably” the projected 2.2% for this year as rising oil prices and a weaker won drive up import costs.
South Korea’s policy-sensitive three-year treasury bond futures erased early gains to fall as much as 0.14 points to 104.24 during the press conference.
Analysts expect no changes in the policy rate this year as a resurgence in inflation from higher energy prices and a weaker won narrows scope for any policy support while officials assess whether domestic demand is strong enough to warrant any tightening ahead.
On the fiscal front, President Lee Jae Myung has been pushing for a 26.2 trillion won ($17.72 billion) additional budget to ease the burden on households and businesses from soaring fuel costs, after the Dubai crude benchmark more than doubled in March.
Among the 30 economists who offered a longer-term view, 26 forecast no rate change through 2026, while three expected 2.75% at year-end and one 3.00%.
“Some interpreted the policy statement to mean that the BOK sees the Iran war posing a greater risk to inflation than to economic growth,” said Ahn Jae-kyun, a fixed-income analyst at Korea Investment Securities. “And this was kind of reinforced during the governor’s press conference – overall, it was neutral.”
Ahn sees the BOK raising the interest rate by 25 basis points in the fourth quarter.
Shin Hyun-song, an Oxford-educated economist, is nominated to helm the BOK after a parliamentary hearing scheduled for April 15.
($1 = 1,478.4000 won)
(Reporting by Cynthia Kim and Jihoon Lee; Editing by Sam Holmes)
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