SEOUL, May 28 : The Bank of Korea kept its benchmark interest rate unchanged on Thursday, while a hawkish split within its seven-member board signaled an imminent turn toward a more restrictive policy stance to curb inflation and support a slumping won.Five of the seven members on the central bank's monetary policy board voted to keep its benchmark interest rate unchanged at 2.50 per cent, while two dissenters voted for a 25 basis point hike.The decision to hold was expected by 30 of 32 economists polled by Reuters. The two outliers forecast a rate rise.The meeting also marked the policy debut of new central bank governor Shin Hyun Song.
"Looking at prices, growth, FX rates, as well as real estate, steps we should be taking going forward is clear. The question is when, how quickly to raise them, and how far," Shin said in a news conference in Seoul. "If you look at our dot plot, that should answer those three questions," he said, referring to the bank's forward guidance chart that revealed a bias towards taking rates higher to 3 per cent in the next six months. Seven dots were at 2.75 per cent, while two dots even predicted the rate rising to 3.25 per cent.The central bank revised up this year's inflation estimate to 2.7 per cent from the 2.2 per cent projected before the Iran war started, factoring in the spillovers from rising oil prices.It raised this year's growth forecast to 2.6 per cent from 2.0 per cent previously, reflecting the robust first-quarter expansion of 1.7 per cent, the fastest in nearly six years.South Korea's policy-sensitive three-year treasury bond futures turned down sharply after the dot plot and policy statement were released, erasing early gains.SHARP SHIFT BY CENTRAL BANKSThe hold reflects a global retreat by central banks from monetary easing into tightening postures, forced by energy price shocks stemming from the Middle East conflict. Governor Shin's cautious approach comes a day after the Reserve Bank of New Zealand also narrowly maintained its policy interest rate at 2.25 per cent. A day before that in Sri Lanka, its central bank stunned markets by raising its overnight policy rate a full percentage point. Analysts expect Shin to be more hawkish than his predecessor Rhee Chang-yong and to prioritise price stability and currency defenses over supporting growth."He got as hawkish as markets had expected him to be, and I think a hike in July is likely, which should be followed by more (hikes)," said Ahn Jae-kyun, an analyst at Korea Investment & Securities.Headline inflation is breaching the central bank's 2 per cent target with the 2.6 per cent April rate marking the fastest gain in almost two years. A weakening won, down 4.5 per cent this year against the dollar, is also bringing inflation into domestic supermarkets and factories, adding further price pressure for a nation dependent on Middle Eastern energy imports.An insatiable global appetite for semiconductors is drumming up the nation's phenomenal export cycle, helping to almost double the benchmark KOSPI this year and generating spillover benefits for local suppliers and factories. Markets have been wagering on a hike.Around two-thirds of the economists polled predicted at least one rate hike by end-September, a sharp shift from last month's survey, when only three of 30 economists expected a quarter-point hike.
