Base Interest Rate Held at 3.5% 'Taking a Breather'... 1.5-Year Streak of Increases Paused (Update)

Bank of Korea, Monetary Policy Direction Decision Meeting
Growth Rate This Year Down 0.1%P to 1.6%

[Image source=Yonhap News]

[Asia Economy reporters Seo So-jeong and Moon Je-won] The Bank of Korea (BOK) decided to keep the base interest rate steady at 3.5% per annum during the Monetary Policy Committee meeting on the 23rd. The Monetary Policy Committee had previously raised the base rate seven consecutive times?an unprecedented record?at meetings in April, May, July, August, October, and November last year, as well as last month. However, with this month’s decision to hold the rate steady, the year-and-a-half-long streak of rate hikes has come to a halt.

At the monetary policy direction decision meeting held that day, the BOK’s Monetary Policy Committee resolved to maintain the base rate at 3.50% per annum. With this decision, the interest rate gap between Korea and the United States remains at 1.25 percentage points.

The reason the BOK held the rate steady despite ongoing high inflation in the 5% range is that fatigue had accumulated from the previous seven consecutive rate hikes (April, May, July, August, October, November last year, and January this year), creating a need to assess their effects. Additionally, concerns over a global economic slowdown leading to continued export sluggishness, as well as fears of a sharp downturn in the real estate market, increased the burden of further rate hikes.

In particular, growing worries about domestic and international economic recessions significantly influenced the decision to keep the base rate unchanged. The global semiconductor industry downturn has reduced Korea’s export performance, and high inflation and high interest rates have weakened consumer recovery, heightening market concerns about further rate increases.

The trade balance recorded a deficit of $12.65 billion last month, marking 11 consecutive months of deficits, while exports plunged 16.6% year-on-year to $46.27 billion. Export figures for the first 20 days of this month (provisional customs clearance basis) also fell 2.3% year-on-year to $33.549 billion, showing little sign of recovery.

According to the minutes of the Monetary Policy Committee meeting held on the 13th of last month, one committee member who supported holding the rate steady pointed out that "due to the ripple effects of the rapidly rising interest rates on the financial sector and the real economy, a quick recovery is unlikely." While Korea’s exports may gradually recover in the second half of the year due to China’s reopening and normalization of economic activities, opinions within and outside the BOK suggest that China is unlikely to provide as much support as in the past.

In a report to the National Assembly on the 21st, the BOK explained, "China’s economic recovery is positive for our economy through improved exports to China and increased tourist inflows," but added, "This time, China’s recovery is expected to be consumption-centered, so its effect on boosting domestic growth will be less than in the past."

With this month’s Monetary Policy Committee decision to pause, the unprecedented eight consecutive rate hikes were avoided, but analysis suggests that the possibility of further increases remains.

This is because the consumer price inflation rate remains stubbornly in the 5% range, and pressure to raise public utility fees is growing, causing the general public’s expected inflation rate over the next year to rise back to the 4% range. Additionally, with the U.S. Federal Reserve (Fed) likely to implement at least two baby steps (0.25 percentage point rate hikes) in March and May, there is a growing perception that the final interest rate has not yet been reached.

Moreover, considering the current 1.25 percentage point interest rate gap with the U.S., some analyses suggest that if this gap widens to as much as 2 percentage points, additional base rate hikes will be inevitable.

Researcher Jo Yong-gu of Shin Young Securities said, "This year, the policy focus has shifted from inflation to growth, and from stabilizing the foreign exchange market to ensuring a soft landing for the real estate market, which seems to have weakened the need for further tightening, serving as the basis for the rate freeze." He added, "Although inflation remains high, it is mostly due to secondary effects of rising raw material prices, so monetary policy responses are not justified." On the other hand, Hwang Yoon-jae, president of the Korean Economic Association and professor of economics at Seoul National University, said, "Sticky price inflation is expected to continue for some time, so inflation will not easily subside," and emphasized, "As the U.S. Fed continues tightening, the BOK should also proceed with additional rate hikes."

On the same day, the BOK revised its economic outlook, lowering this year’s economic growth forecast from 1.7% to 1.6%, and the consumer price inflation forecast from 3.6% to 3.5%, each by 0.1 percentage points. The BOK expects growth to rise to 2.4% next year, with inflation stabilizing at 2.6%.

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