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

Bank of Korea Governor Rhee Chang-yong says it's too early to start talking about rate cuts.

The South Korean central bank was one of the first to pause its tightening cycle, spurring market speculation that it could soon begin cutting rates. But Rhee told CNBC's Chery Kang at the Asian Development Bank's annual meeting Incheon that those expectations are "premature."

"We made it clear, given that our core inflation is still well above our target, and our inflation is going below 4% ... so it's going down," Rhee said Wednesday. "But still, I think that given that it's above the target, we have to wait and see and then you know, it would be a little bit premature to talk about pivot at this moment."

Rhee's comments come a day after the economy reported inflation reached a 14-month low of 3.7% while hovering above the central bank's target of 2%.

"We paused our interest rate [hikes] in the last two meetings because we have increased our interest rate by 300 basis points in 1½ years, very fast in pace. And we think it's the right time for us to kind of assess what is the accumulated impact from this rapid increase," Rhee said.

Wall Street banks such as Citi predict South Korea could start a rate-cutting cycle as early as the third quarter as headline consumer price index readings coming down even further.

"In our view, headline CPI is likely to fall to early-mid 3%YoY levels in May'23E and 2%YoY levels in June'23E, potentially opening up scope for a rate-cutting cycle from 3Q23E," Citi economists Jiuk Choi and Jin-wook Kim said in a Tuesday note.

The Bank of Korea governor noted that global inflation levels seem to have peaked despite seeing stickiness in core readings.

"I think the tightening cycle in advanced economies seems close to an end," he said, adding that he thinks advanced economies cannot continue their rapid hikes given "financial stability issues" in the U.S. and Europe.

The banking crisis in the West has had an limited impact on South Korea, he said. He also noted that the foreign exchange rate for the South Korean currency is not concerning.

"We are not very much concerned on the every day change of the exchange rate, but we definitely have to be careful for the large volatility," he said, noting that the currency has traditionally seen pressure on dividend payouts for foreign investors in April.

The South Korean won hit 1,340.77 against the U.S. dollar early Wednesday, the weakest level since November.