For the first time since the summer of 2021, a monetary policy meeting of the Bank of Korea did not result in a rise in key interest rates, with the authorities preferring to leave them unchanged at 3.5%. This decision marks the most likely end of a bull cycle, which has pushed Korean rates to the highest level in 14 years.
It has certainly not been taken lightly: the choice of the monetary status quo came when South Korean inflation reached 5,2% in January, more than double the target set by the monetary authorities in Seoul, and the downwards-oriented won is not likely to calm it down.
However, the South Korean economy contracted in the fourth quarter (-0.4% compared to the previous quarter), the first contraction since 2020 and the pandemic. The slowdown in world demand is weighing on this highly exporting country. But the domestic market is also struggling, as the housing market shape weighs on household confidence and spending.
The government expects a rebound later in the year as the recovery of the Chinese neighbour gains momentum. But the year still looks very disappointing in terms of growth (we expect a tiny 1.5% for the current year). Therefore, after being one of the first central banks to stop the rate hike, the Bank of Korea could also be the first to start a downward trend.
The central bank has to be careful to do that
At a time when US yields remain on an upward trend and will exceed 5% by the end of the year according to the Fed’s forecasts, the gap between the yields offered by the Korean bond and that of the United States is widening, which will continue to weigh on the won. And when the won weakens, energy prices, denominated in US dollars, increase, causing inflation to soar. So any reduction in key rates in a too-short time frame would further accentuate this risk.
While waiting for the country’s promised recovery, we keep an eye on our positions in Korea. We are concerned about the country’s economic prospects and that Washington is asking Seoul to choose between its privileged ties with the United States and its main client, China.
A pressure that does not do the business of Korean companies, accustomed to trading with both.