"This Year’s Base Interest Rate Expected to Be 3.75% in the First Half and 4% by Year-End"

Hankyung Research Institute '2023 Base Interest Rate Forecast'

[Asia Economy Reporter Park Sun-mi] The Bank of Korea is expected to raise the base interest rate, currently at 3.5% per annum, to around 3.75% in the first half of the year and 3.75~4.0% by the end of the year.

On the 23rd, the Korea Economic Research Institute (KERI) stated in its analysis titled '2023 Base Interest Rate Forecast and Policy Implications' that the possibility of additional rate hikes by the U.S. Federal Reserve and domestic inflationary pressures are increasing the pressure to raise Korea's base interest rate. However, considering the adverse effects on the sluggish real economy, the extent of the increase is expected to be limited. This is because, except for major crises such as the foreign exchange crisis and COVID-19, the Korean economy has maintained a growth rate in the 2% range, but this year, low growth in the 1% range is expected to fall short of that.

KERI used quarterly data from Q1 2001 to Q4 2022 and predicted this year's base interest rate through 10 models, including the autoregressive moving average model. The average level of the domestic base interest rate estimated by the 10 models for each half-year is 3.75% at the end of the first half and 4.0% at the end of the year.

When estimating the interest rate level using only five models that consider exogenous variables that could affect Korea's base interest rate decision among the 10 models, the results showed 3.75% in the first half and 3.75% at the end of the year. This suggests that the Monetary Policy Committee may raise the base interest rate only once in the first half and may not raise it further in the second half.

Based on the analysis results, KERI stated that if international raw material prices such as petroleum and global inflation stabilize and major countries do not raise rates further, the domestic base interest rate could be raised to 3.75% in the first half and maintained at 3.75% in the second half. However, if the stabilization of international raw material prices and inflation does not follow, there is a possibility that the base interest rate could be raised once more (by 0.25%) in the second half.

Regarding this, Choo Kwang-ho, Director of Economic Policy at KERI, said, “Despite the domestic economic recession, the pressure to raise the domestic base interest rate has increased due to inflation burdens and the possibility of additional rate hikes in the U.S., making it difficult for the Bank of Korea to operate monetary policy.” He added, “Rather than simply following the U.S. rate hikes, careful interest rate decisions are needed by comprehensively considering whether competing countries raise rates and the domestic economic situation.”

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