Bank of Korea wrong-foots market with rate hold; questions raised on anti-inflation stance and bank NPLs

The Bank of Korea held interest rates yesterday in a surprise move which caught fixed-income traders who had factored in a 25-basis point rise by surprise. The move questions Korea’s efforts to tackle inflation and raises concerns that the central bank is shielding banks from increases in non-performing loans by holding down rates.

The Bank of Korea wrong-footed market participants on May 12 by maintaining base rates at 3%. The move surprised in a market which is seen as being badly in need of inflationary controls, and had market participants guessing at the central bank's motives, as well as questioning its inflation-busting credentials. Headline consumer price index (CPI) inflation in South Korea is running at 4.2%, while