By Cynthia Kim and Jihoon Lee
SEOUL (Reuters) -South Korea's central bank on Thursday hinted it may pivot towards monetary easing along with its global peers, sending bond futures up after a widely-expected decision to keep its policy interest rate unchanged for an eighth meeting.
The Bank of Korea (BOK) held its benchmark rate at 3.50% at a policy review in Seoul, an outcome correctly forecast by all 38 economists polled by Reuters.
Crucially, the central bank also dropped language from its previous statement that said it will 'judge the need to raise base rate further,' in its strongest hint yet of a shift towards policy easing after delivering a total of 300 basis points of hikes since mid-2021.
"In financial and foreign exchange markets, long-term Korean Treasury bond yields have fallen due to expectations of a pivot in monetary policy stances both at home and abroad," the BOK said in the statement, and added that risks related to real estate project financing have heightened.
At a post-policy press conference, Governor Rhee Chang-yong pushed back on growing market expectations for any near-term BOK rate cuts, when asked about the timing of monetary easing.
"My personal view is that I see little chances (of any rate cuts) for the next six months," Rhee said.
"Any premature rate cut could reignite inflation expectations which could adversely affect the economy by triggering expectations about a property market boom, rather than work to support growth."
South Korea's policy-sensitive three-year treasury bond futures trimmed earlier gains after the press conference, but were still up by 0.08 points to 105.02.
Analysts' consensus is for the BOK to start cutting rates in the third quarter of this year but as price pressures soften some are betting on an earlier start to policy easing.
"A key reason why we expect rate cuts soon is that price pressures are easing...In addition, a weak economy will help to put downward pressure on underlying prices, said Ankita Amajuri, economist at Capital Economists in a note to client, noting that a forecast drop in oil prices would also help slow inflation.
The BOK's policy outlook is expected to be guided by the pace of monetary easing by the U.S. Federal Reserve and any money market jitters related to the country's ongoing efforts to restructure debt-ridden companies.
South Korean policymakers are trying to engineer a soft landing for the economy, and remain wary of rushing into rate cuts which could further inflame record-high household debt and threaten financial stability.
Consumer inflation eased for a second month in December to 3.2%, bringing relief to policymakers worried about persistent price risks. The BOK expects inflation to return to the bank's 2% target either by the end of this year or early next year.
"Rhee said it's too early to discuss policy easing but given that the Fed changed their tone in December, we can also expect (the BOK) to turn dovish anytime," said Baik Yoon-min, an analyst at Kyobo Securities, who sees the BOK starting to cut interest rates in the second quarter.