By Michael Kitchen, MarketWatch
LOS ANGELES (MarketWatch) — The Bank of Korea left its policy interest rate unchanged at 2.75% Friday, but comments from the central bank suggested further tightening is likely in the months ahead.
According to a Reuters survey ahead of the decision, 13 out of 21 economists had expected the central bank to hike the rate in order to dampen inflation as the economy picks up steam. Korea raised the benchmark base rate by a quarter point at its previous meeting Jan. 13.
Still, in a statement accompanying the decision, the Bank of Korea’s monetary policy committee said it’s forecasting inflation to pick up as the year goes on.
Consumer price inflation in Korea has increased significantly, driven by the prices of petroleum products and farm produce.
“In the coming months, the Committee expects high inflation expectations to continue and inflationary pressures to also persist as the economic upswing continues,” pointing to recent price rises, particularly for food, petroleum products, and real estate.
In January, consumer inflation rose 4.1% from the year-earlier period, breaching the Bank of Korea’s 2%-4% target band.
“Looking ahead, the committee will conduct monetary policy in such a way as to firmly anchor the basis for price stability while the economy continues its sound growth,” the committee said.
“Despite today’s decision to stay on hold, the accompanying statement retained a relatively hawkish tone,” Brian Jackson at RBC Capital Markets said in email comments.
He added that Bank of Korea Gov. Kim Choong-soo, speaking after the decision, said the move wasn’t unanimous, “indicating that there is still support on the committee for further action.”
Jackson said RBC expects a quarter-point rate hike at the next meeting, in March, a forecast also put forward by Royal Bank of Scotland analyst Erik Lueth following Friday’s announcement.
South Korea’s benchmark Kospi (XX:$SEU 1,977, -31.31, -1.56%) rose for several hours following the decision, but soon sold off to close with a 1.6% loss, ending below the psychologically important 2,000 level, at 1,977.19.
The drop came amid reports of foreign selling, with the Korean newspaper Chosun Ilbo reporting on its website that offshore investors’ stock sales were the heaviest in three months. The report cited analysis by J.P. Morgan as saying monetary-policy tightening was driving foreign players out of many recently popular markets.
Meanwhile, the Korean won slipped, with the U.S. dollar rising to 1,119.20 won, up from 1,114.50 won before the decision, according to figures from Dow Jones Newswires.
