S. Korean central bank slows rates hikes, says too soon to discuss easing

© Reuters. FILE PHOTO: The logo of the Bank of Korea is seen on the top of its building in Seoul, South Korea, March 8, 2016. Picture taken on March 8, 2016. REUTERS/Kim Hong-Ji

By Cynthia Kim and Jihoon Lee

SEOUL (Reuters) - South Korea's central bank raised interest rates by 25 basis points on Thursday, slowing the pace of tightening, though Governor Rhee Chang-yong said it was too early to discuss when to start cutting rates.

The Bank of Korea (BOK), trying to tame inflation without choking off economic growth, said it would continue to tighten monetary policy as needed even as it sharply downgraded its growth projections for 2023.

The bank raised its benchmark policy rate to 3.25%, the highest since 2012, after delivering a half-percentage point hike in October.

It forecast the South Korean economy would expand 1.7% in 2023, down sharply from a previous forecast for 2.1% growth, but stuck to this year's 2.6% growth projection. It trimmed its 2023 inflation forecast to 3.6% from 3.7%.

The BOK is in the midst of its most aggressive policy tightening on record. It was a regional front-runner in withdrawing pandemic-era stimulus when it started raising rates in August 2021.

Since then, it has raised rates 275 basis points, delivering 50-basis-point hikes for the first time since the current monetary framework was introduced in 1999. It tightened by that amount in July and October.

Policymakers are trying to balance the need to curb inflation - at 5.7% versus a target of 2% - against rising debt, falling property prices and slumping exports.

"With growth slowing and inflation easing, we think there is a good chance this marks the end of the central bank’s tightening cycle," said Gareth Leather, senior Asia economist at Capital Economics.

South Korea's benchmark 10-year treasury bond yield dropped as much as 14.5 basis points after the rate decision and the release of its policy statement.

The slowdown in tightening has also been facilitated by a rebound in the local currency.

As aggressive U.S. monetary tightening buoyed the dollar this year, many central banks in Asia have sought to hike rates in step with the Federal Reserve to keep their currencies from weakening too much against the greenback, risking capital outflows.

South Korea's won has rebounded more than 7% from a 13-year low against the dollar touched in late October.

The BOK's 25-basis-point hike is smaller than recent moves by some regional peers. Central banks in the Philippines and New Zealand have pressed ahead with outsized rate hikes after the Fed's four consecutive 75-basis-point rate increases.

Median forecasts of analysts in a Reuters poll point to the BOK ending its rate hikes at 3.50% by the end of March.