Bank of Korea governor says it's 'premature' to talk about rate cuts

Important Points

Rhee made his comments a day before the economy reported that inflation had reached a low of 3,7%, a record for 14 months. It was still above the target of the central bank of 2%.

Rhee Chang Yong, the Bank of Korea governor, says that it is too early to talk about rate reductions.

South Korea's central bank was the first to stop its tightening cycle. This fueled speculation in the market that it would soon start cutting rates. Rhee said to Chery Kang of CNBC at the Asian Development Bank annual meeting Incheon, that these expectations were "premature."

Rhee stated Wednesday that "we made it clear that, given that core inflation was still above our target and that our inflation has been, we have some good news. Our inflation is dropping below 4% by April. So, it is going down." "But I still think that since it is above target, we need to wait and watch and then, you know, at this point, it would be premature to talk about a pivot." Rhee said Wednesday.

Rhee made his comments a day after it was reported that the inflation rate had reached a record low of 3,7%, a figure which is still above the target set by the central bank of 2%.

We paused [our interest rate] increases in our last two meetings, because we increased our rate by 300 basis point in just 1 1/2 years. We think now is the time to assess the cumulative impact of this rapid rise," Rhee stated.

Citi, a Wall Street bank, predicts that South Korea may start a rate cutting cycle in the third quarter if consumer prices continue to fall.

In a note published on Tuesday, Citi economists Jiuk Choi, and Jin-wook, Kim, said that they believe the headline CPI will fall to levels between early and mid 3% YoY in May '23E. By June '23E it is expected to drop to 2% YoY. This could potentially open up the possibility of a rate cutting cycle starting in 3Q23E.

Peak inflation

The Bank of Korea Governor noted that global inflation seems to have peaked, despite the stickiness of core readings.

He said that the "tightening cycle" in advanced economies was nearing an end. He also added that the "financial instability issues" in Europe and the U.S. would prevent the advanced economies from continuing their rapid increases.

He said that the banking crisis in Western countries has only had a limited impact on South Korea. He noted that the South Korean currency's foreign exchange rate is not a cause for concern.

He said that while he was not concerned about the daily fluctuations in the exchange rate, he did warn of the high volatility. The currency is known to have a negative impact on dividends paid out by foreign investors during April.

The South Korean won