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.
“The growth rate for this year is expected to be below the February forecast of 2.0%,” the bank said in a statement, adding that the future path is likely to be determined by the Iran war, the semiconductor cycle and other factors.
The BOK now expects headline inflation to “exceed considerably” the February forecast of 2.2% as higher oil prices and the won’s recent weakness has effectively raised the cost of essential imports.
South Korea’s policy-sensitive three-year treasury bond futures extended gains after the policy statement to rise as much as 0.19 points to 104.57.
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%.
“There certainly are downside risks to growth from the Middle East conflict but momentum seems to be solid for now thanks to brisk exports and a planned extra budget,” said Cho Yong-gu, an analyst at Shinyoung Securities.
“I expect the BOK to stay more neutral than excessively hawkish, given we have a major supplementary budget coming.”
Governor Rhee Chang-yong will hold a press conference at 0210 GMT, which will be live-streamed via YouTube.
It will be his last policy decision news conference with Shin Hyun-song, an Oxford-educated economist, nominated to helm the BOK after Rhee’s term ends on April 20.
($1 = 1,478.4000 won)
(Reporting by Cynthia Kim and Jihoon Lee; Editing by Sam Holmes)
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