The Bank of Korea Likely to Raise Interest Rate by 0.25%P at the Monetary Policy Committee Meeting on the 25th... Growth Rate Forecast in Focus

August Revised Economic Outlook: Growth Rate Down, Inflation Up

Bank of Korea Governor Lee Chang-yong is answering questions from the press at the Monetary Policy Direction press conference held at the Bank of Korea in Jung-gu, Seoul on July 13. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Seo So-jeong] "If the domestic inflation trend does not deviate significantly from the currently projected path, it is desirable to gradually raise interest rates by 0.25 percentage points for the time being." (July 13, Lee Chang-yong, Governor of the Bank of Korea)

With the Bank of Korea's Monetary Policy Committee scheduled to decide the base interest rate on the 25th, the financial industry widely expects the rate to rise by 0.25 percentage points to reach 2.50% per annum at this meeting. Last month, the Monetary Policy Committee implemented a 'big step' (a 0.50% increase in the base rate) for the first time in history. At a press conference immediately afterward, Governor Lee indicated that if inflation remains at a higher level for several months and then gradually declines, as expected, the committee would not take another big step like in July. This was a prior indication that, barring exceptional circumstances, the remaining three meetings this year would see the base rate raised by 0.25 percentage points each time.

Since international oil prices, which had been driving up import prices, have fallen, and the previously soaring international grain prices have also stabilized, the prevailing view is that domestic inflation will soon reach its peak. Last month, the average monthly price of Dubai crude oil was $103.1 per barrel, down 8.9% from the previous month. The price of Dubai crude oil was $83.5 per barrel in January this year, broke the $100 mark in March at $110.9, rose to $113.3 in June, and then eased to $103.1 in July, returning to the level seen in April ($102.8).

Due to the drop in international oil prices, import prices have shifted to a downward trend after three months. The U.S. Consumer Price Index (CPI) also recorded its largest year-on-year increase since November 1981, surging to 9.1% in June, but the rise slowed somewhat to 8.5% in July, prompting discussions about the need to moderate the pace of rate hikes. Accordingly, the market has largely accepted that the Monetary Policy Committee will take a 'baby step' (a 0.25 percentage point increase) rather than a big step at next week's meeting, as previously signaled by the governor.

However, the July consumer price index rose 6.3% compared to a year earlier, marking the highest increase in 23 years and 8 months since November 1998 during the foreign exchange crisis, and the fact that inflation is unlikely to ease easily in the near term remains a variable. The recent heavy rains, which have raised concerns about agricultural production, also add upward pressure on prices. The government expects inflation to peak around September to October and then slow down.

On the 25th, the Bank of Korea's Monetary Policy Committee will announce not only the base interest rate decision but also revised forecasts for South Korea's economic growth rate and consumer price inflation. In May, the Bank of Korea projected this year's growth rate and inflation rate at 2.7% and 4.5%, respectively, but adjustments are inevitable, likely lowering growth and raising inflation forecasts.

Moon Hong-cheol, a researcher at DB Financial Investment, said, "Domestic inflation is expected to peak around October, and at the July 25 Monetary Policy Committee meeting, the forward guidance to raise interest rates by 0.25 percentage points going forward is likely to be realized. Attention will also focus on how much the Bank of Korea will adjust this year's and next year's growth and inflation forecasts in the revised economic outlook in August, as well as the future direction of monetary policy."

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