The chief of South Korea's central bank said Monday it is too early to talk about a rate cut as there are no clear signs that inflation in Asia's fourth-largest economy is approaching its target level.

Bank of Korea (BOK) Gov. Rhee Chang-yong also said the central bank had not expected the U.S. Federal Reserve to hint that there will be two more rounds of rate hikes after freezing its rate earlier this month.

"We may mull a rate cut if there are clear signs that inflation is approaching the 2 percent target," Rhee told reporters. "But it is too early to mention (a rate cut) at this moment."

Inflation in South Korea will pick up steam later this year after an extended slowdown, in the face of upward pressure from higher global oil prices, a potential depreciation of the Korean won and higher core inflation, the central bank said in a report.

"Consumer inflation will show a substantial slowdown and is highly likely to stay below the 2 percent level before rising to above the 3 percent level around the end of the year," the Bank of Korea said in a report.

Consumer prices, a key gauge of inflation, rose 3.3 percent in May from a year earlier, slowing from a 3.7 percent on-year rise in April. The latest reading marked the lowest level since 3.2 percent in October 2021.

South Korea's inflation has been on a downward trend with some ups and downs after reaching a peak of 6.3 percent in July last year.

But the latest figure is still above the central bank's medium term target of 2 percent.

"Core inflation is judged to face the risk of upward pressure amid uncertainties, such as a higher oil price trend, future economic conditions and public utility price hikes," the central bank said.

Core inflation, which excludes volatile food and energy prices, rose 3.9 percent on-year last month, slowing from the 4 percent on-year gain the previous month but still higher than consumer inflation.

The central bank assessed that the trend of higher core inflation may continue longer than expected due to sound domestic demand and job conditions in addition to widely expected hikes in public service fees later this year.

The minutes from the central bank's monetary policy board meeting on May 25 also showed that most board members raised their guards against complacency over slowing inflation.

Last month, the BOK kept its benchmark rate unchanged at 3.5 percent, the third straight month of a rate freeze, as it trimmed this year's growth estimate in the face of an extended slowdown in exports amid easing inflationary pressure.

Rhee also said the BOK had surely expected the U.S. Fed to raise its benchmark rate one more time but did not expect two rounds of rate hikes.

"Should the Fed up the rate by 50 basis points, its impact on the currency rate and capital flows will be enormous," Rhee said. "We need to implement our monetary response taking into account the Fed's rate hikes on the market consideration."

Earlier this month, the Fed froze its benchmark rate at a 5 percent-5.25 percent band, snapping a 10-month streak of rate hikes since March last year.

The Fed, however, hinted it may hike the federal funds rate further during the remainder of 2023.

The Fed's possible rate hikes could put the BOK in a quandary over whether it should follow suit to prevent such possible headwinds or stand pat amid a slowing economy.

Source: Yonhap News Agency