By Cynthia Kim and Yena Park
SEOUL (Reuters) – A former deputy governor of the Bank of Korea said on Friday that the central bank will probably not cut interest rates this year as the battle against inflation is far from over, challenging the market consensus on two rate cuts in the second half.
“Interest rate cuts are not easy even in the second half of the year,” Lee Seung-heon, the bank’s former No. 2, said in an interview with Reuters. “It’s not that the economy is in sharp decline and there’s no need to rush for a cut just because the (growth) momentum isn’t as robust.”
Lee, who retired in August, spoke Friday ahead of the central bank’s interest rate review and noted that the won was trading at around 1,350 to the dollar, not far from this year’s lows.
His comments call into question long-standing analyst forecasts that called for cuts of 25 basis points in both the third and fourth quarters to bring the benchmark interest rate to 3.00% by the end of this year from the current 3.50%.
The BOK has seen a total of 300 basis points of increases since mid-2021.
Policymakers will have to wait until at least June to give markets some signal about possible cuts because rising global oil prices threaten to sharply increase pricing pressures and because the strength of domestic consumption needs to be further scrutinized, he said.
Indeed, the latest data has shown that overall inflation remains sticky.
The consumer price index (CPI) rose 3.1% in March from a year earlier, the same pace as in February after three months of easing, fueling views that it is still too early for the BOK to take action. consider easing.
The BOK’s inflation target is set at 2%.
Lee, currently a professor at Soongsil University, did not specify a timeline for when officials might be able to reduce financing costs.
“We will see some clarity on the course of the economy by June, but I think the economic data will probably give officials more reason to hold off.”
In a February press conference, BOK Governor Rhee Chang-yong revealed that one of the seven board members wanted the door for a rate cut to remain open over the next three months. This had prompted investors to bet on a short-term cut.
In the past, the BOK has tended to cut rates within a few months of a no vote.