BoK Holds Base Rate at 0.5%... Raises This Year's Growth Forecast to -1.1% on 'Export Rebound' (Comprehensive)

Base Interest Rate Held Steady at 0.5% per Year
Growth Rate Revised to -1.1% This Year and 3.0% Next Year

[Asia Economy Reporter Jang Sehee] The Monetary Policy Committee of the Bank of Korea decided on the 26th to maintain the base interest rate at the current annual rate of 0.5%. This decision was made to maintain an accommodative monetary stance amid concerns over the third resurgence of COVID-19. It also appears to consider the risk of the loosened liquidity rapidly flowing into asset markets such as real estate and stocks.

On the 26th, the Monetary Policy Committee held a plenary meeting at the Bank of Korea and froze the base interest rate at the current annual rate of 0.5%. In the monetary policy direction statement, the committee stated, "Going forward, the global economy and international financial markets are expected to be influenced by the degree of COVID-19 resurgence, vaccine development status, policy responses of each country, and their ripple effects."

In March, when the financial market fluctuated at the early stage of the COVID-19 outbreak, an emergency monetary policy meeting was held, and the base interest rate was sharply lowered from 1.25% to 0.75%. After lowering the base rate once more to 0.50% in May, the rate was kept steady at the current level through three meetings in July, August, and October.

The base interest rate has already nearly reached the effective lower bound, considered the monetary policy's last line of defense. Further cuts would align the rate with that of the U.S. Federal Reserve (Fed), potentially causing foreign investment outflows. Additionally, further rate cuts might stimulate housing price increases rather than aid economic recovery, which is interpreted as the reason for the rate freeze decision.

Regarding this, Professor Andonghyun of Seoul National University’s Department of Economics emphasized, "It seems they believe that even if rates are raised, a full-scale economic recovery would be difficult," adding, "Lowering rates carries the risk of increasing household debt."

The Bank of Korea revised this year's and next year's growth rates upward to -1.1% and -1.3%, respectively. The improvement in exports raised this year's growth forecast. The Bank of Korea stated, "Going forward, the domestic economy is expected to show a moderate recovery centered on exports and investment, but the uncertainty of the growth path is judged to be high." In fact, the export growth rate in the third quarter of this year was 15.6%, the highest since the first quarter of 1986 (18.4%).

Experts cited 'export rebound and removal of market uncertainty' as factors for the upward revision of the growth rate.

Professor Andonghyun of Seoul National University’s Department of Economics said, "It appears that the growth rate was revised upward due to a stronger-than-expected export rebound in the fourth quarter," adding, "Also, the rebound in the Chinese economy was stronger than expected, which likely had a positive effect on the growth rate." Professor Lee Inho of Seoul National University’s Department of Economics stated, "With Joe Biden elected as U.S. president, some market uncertainties were removed, leading to the upward revision of the growth rate," but added, "However, if the COVID-19 spread continues, the potential growth rate could decline in the mid to long term."

Meanwhile, the Bank of Korea also revised this year's consumer price inflation rate upward from 0.4% to 0.5%. Next year's inflation is expected to be 1.0%.

This content was produced with the assistance of AI translation services.