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| Groceries are on display at a supermarket in Seoul in this photo taken on March 29. Yonhap |
By Yi Whan-woo
The Bank of Korea (BOK) is anticipated to freeze its benchmark interest rate this week for the second straight time, as inflation keeps falling while signs of an economic downturn are heightening, according to analysts, Sunday.
The BOK is scheduled to hold a rate-setting meeting, Tuesday, after halting a monetary-tightening campaign that lasted for more than a year and kept the base rate unchanged at 3.5 percent in its last meeting in February.
Under the circumstances, economists said cooling inflation can bring confidence for the central bank to end its inflation-focused policy and concentrate on curbing an economic slowdown.
They were referring to consumer prices that have stayed in the 4 percent range for the second straight month as of March after surging to as high as 6.3 percent in mid-2022.
They are citing a sharper decline in exports ― the main driver of growth ― that left the country's trade balance in the red for 13 consecutive months in March. The trade-dependent Korean economy accordingly suffered a current account shortfall for the second straight month as of February.
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"Upward pressure on consumer prices has been the most critical reason for the BOK's rate hike, but such pressure certainly has been reduced," LG Economic Research Institute economist Cho Young-moo said
In particular, he noted inflation in March stood at 4.2 percent, which is the lowest level in a year.
Hyundai Research Institute Deputy Director Joo Won said the BOK may "no longer take inflation into account in its rate policy," arguing that inflation will be further softened to a range of 3 percent in the second quarter of this year.
He went on to say, "Economic downturn matters more than inflation at the moment and that the BOK will freeze the rate."
Analysts speculated the key interest rate will peak at the current level and that the BOK may even cut the rate in the coming months.
"The financial market will be hugely confused in understanding the BOK's rate policy if it freezes and hikes the rate inconsistently," Joo said. "In that regard, the rate hike can be said to be over."
Hi Investment & Securities analyst Kim Myung-sil said, "A need for rate cut in a pre-emptive manner will gain ground if sluggish exports continue in the second half of the year."
Ahn Ye-ha, an analyst at Kiwoom Securities, speculated the BOK may move fast to drop the policy rate if inflation cooldown in the United States also becomes "undeniable" and thus prompts the U.S. Federal Reserve to reconsider its credit tightening policy.
U.S. inflation grew at 6 percent in February, marking the slowest level in 18 months and continuing its gradual cooling trend after surpassing more than 9 percent last year.
Over the past 12 months, the Fed has increased its benchmark interest rate from near zero to a range of 4.75 percent to 5 percent.
It, however, recently slowed the pace of its rate hike, including in March when it hiked the rate by 25 basis points, as compared to 50 basis points and 75 basis points last year.
Meanwhile, some market observers said the possibility of a BOK rate hike should not be ruled out.
They noted the U.S.-Korea interest rate gap of up to 1.50 percentage points is the widest in more than 12 years and that concerns remain in Seoul over the plight of foreign capital in search of safe-haven assets.
The gap will widen further if the BOK freezes the rate in March and the Fed delivers another rate hike in its next meeting in May.
