The Bank of Korea Holds Base Rate at 0.75%... Stock Market and Exchange Rate Volatility Increase, Economic Slowdown Concerns (Update)

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[Asia Economy Reporter Jang Sehee] The Bank of Korea's Monetary Policy Committee decided on the 12th to keep the base interest rate unchanged at the current 0.75%. This is due to the decline in real economy indicators caused by the impact of the fourth wave of COVID-19 and increased uncertainty in the global financial markets.

On the day, the Bank of Korea held a Monetary Policy Committee meeting chaired by Governor Lee Ju-yeol and announced that the base interest rate would be maintained at 0.75% per annum. The committee had raised the base rate to 0.75% in August and had signaled further hikes within the year. However, considering that consecutive rate hikes could strain economic recovery, this month’s decision is seen as a pause.

Surveys by the Korea Financial Investment Association also showed a strong consensus for a rate freeze. At the end of last month, the association surveyed 200 domestic bond market participants about the direction of the base rate, and 87% of respondents expected the rate to remain unchanged. They cited uncertain external conditions such as the US debt ceiling negotiations and the Evergrande crisis, as well as a wait-and-see approach to the policy effects following the August rate hike.

The Bank of Korea’s decision to hold rates reflects ongoing real economy shocks from the fourth wave of COVID-19 and increased volatility in financial markets.

According to the 'August Industrial Activity Trends' released by Statistics Korea on the 30th of last month, industrial production, consumption, and investment all declined simultaneously in August. This is the first time in three months since May that all three sectors have decreased together. Total industrial production fell by 0.2% month-on-month, retail sales?a proxy for consumption?decreased by 0.8%, and facility investment dropped by 5.1%. The Korea Development Institute (KDI) stated that "amid a slowdown in recovery due to sluggish face-to-face services, global economic uncertainties have expanded, increasing downside risks."

The decision to hold rates was also influenced by increased financial volatility due to global issues. Indeed, global negative factors such as the China Evergrande crisis, US debt ceiling negotiations, and inflation concerns have been occurring continuously.

As a result, the KOSPI index fell below the 3,000 mark for the first time in six months. In the Seoul foreign exchange market on the same day, the won-dollar exchange rate started at 1,196.0 won, up 1.4 won, then rose further during the session, reaching the 1,198 won level. This intraday high was the highest level in about 1 year and 2 months since July 28 last year (1,201.00 won), breaking the previous yearly high.

Meanwhile, the possibility of a rate hike has increased for the Monetary Policy Committee meeting scheduled for the 25th of next month, the last meeting of this year.

Regarding this, Professor Andonghyun of Seoul National University’s Department of Economics predicted, "After transitioning to the With-Corona phase, confirming improvements in economic indicators, the process of confidently raising rates is expected. At next month’s Monetary Policy Committee meeting, rates are likely to be increased to curb the rise in household loans and real estate prices."

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