BoK: "Rate Freeze but Hiking Bias Continues... 3.75% Possible with 5 MPC Members" (Comprehensive Report 2)

Base Interest Rate Held at 3.5%
Fatigue from Consecutive Rate Hikes Accumulates
Growth Forecast Lowered by 0.1%P to 1.6% This Year
Increased Uncertainty in Korean Economy
Lee Chang-yong: "Assessing Need for Additional Hikes"

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the regular Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul on the 23rd. Photo by Joint Press Corps

[Asia Economy Reporters Seo So-jeong and Moon Je-won] Lee Chang-yong, Governor of the Bank of Korea (BOK), emphasized on the 23rd that the decision to keep the base interest rate unchanged should not be interpreted as the end of the rate hike trend. Regarding the future terminal rate, one Monetary Policy Committee (MPC) member supported maintaining the current level of 3.5%, while five MPC members expressed the view that the possibility of raising it to 3.75% should remain open, suggesting the potential for further rate hikes.

The BOK's Monetary Policy Committee held a meeting on the 23rd and decided to keep the base interest rate unchanged. In this decision, MPC member Cho Yoon-je expressed a minority opinion that it would be desirable to raise the base rate by 0.25 percentage points.

The MPC had previously raised the base rate consecutively seven times for the first time in history during meetings in April, May, July, August, October, and November last year, as well as last month. However, with the rate freeze at this month's meeting, the rate hike streak that lasted for one and a half years has come to a halt.

The BOK’s decision to pause by keeping the base rate unchanged reflects a greater focus on 'economic recession' amid ongoing unstable economic conditions. On the same day, the BOK lowered its economic growth forecast for this year by 0.1 percentage points from the November forecast of 1.7%.

Governor Lee Chang-yong stated, "The MPC will operate monetary policy with attention to financial stability while monitoring growth trends and ensuring that inflation stabilizes at the target level over the medium term." He added, "Although domestic economic growth is expected to slow, inflation is projected to continue rising above the target level, and given the high uncertainty in policy conditions, it is necessary to focus on price stability and maintain a tightening stance for a considerable period while assessing the need for additional hikes."

The BOK’s decision to hold rates steady despite persistent high inflation stems from the accumulated fatigue caused by consecutive rate hikes, increasing the need to assess their effectiveness. Recently, the government officially acknowledged economic slowdown for the first time, and concerns over a hard landing in the real estate market have heightened, adding pressure against further hikes. Kang Min-joo, an economist at ING Bank, explained, "Due to last year's rapid rate hikes, financial market conditions have tightened, and with household debt deleveraging underway, additional hikes could prolong the economic downturn. The MPC’s decision to hold rates this month appears to reflect concerns that further tightening could lead to a sharp economic decline."

◆This Year’s Growth Forecast Lowered by 0.1%P to 1.6% = In its revised economic outlook, the BOK lowered this year’s growth forecast to 1.6%. This forecast is lower than most institutions such as credit rating agency Fitch (1.9%), the Organisation for Economic Co-operation and Development (OECD, 1.8%), Korea Development Institute (KDI, 1.8%), and the International Monetary Fund (IMF, 1.7%), equal to the government’s forecast (1.6%), and higher than the Korea Economic Research Institute’s (1.5%). The BOK also lowered its consumer price inflation forecast for this year by 0.1 percentage points from 3.6% to 3.5%. It expects growth to rise to 2.4% next year, with inflation stabilizing at 2.6%.

As the BOK repeatedly lowers its economic growth forecast this year, market attention is focused on the potential impact on future monetary policy. The decision to keep the base rate at 3.5% was largely influenced by growing concerns over domestic and global economic recessions. Global semiconductor industry downturns have led to continued export declines, and high inflation and interest rates have weakened consumer recovery, fueling market worries about further rate hikes. With exports faltering, South Korea’s real GDP growth turned negative (-0.4%) in the fourth quarter of last year, and forecasts suggest continued contraction in the first quarter of this year. The prolonged Russia-Ukraine conflict and rate hikes by major countries have deepened the global economic slowdown, further weakening growth momentum.

Lee Jae-hyung, a researcher at Yuanta Securities, said, "With stable market liquidity, slowing money supply growth, and declining household debt, the need to manage liquidity has lessened. Although uncertainty in major countries’ monetary policies remains high, concerns over credit tightening in real estate and public utility price hikes have been factored into monetary policy due to their impact on household interest burdens."

However, a variable is the recent increased likelihood that the U.S. Federal Reserve (Fed) will maintain policy rates at higher levels for longer than expected, accompanied by hawkish remarks from key officials, raising the upper bound of the U.S. terminal rate. Although the MPC’s rate freeze maintained the gap with the U.S. at 1.25 percentage points (Korea 3.50% vs. U.S. 4.50?4.75%), if the Fed raises rates by at least a baby step (0.25 percentage points) next month, the gap will widen to a record 1.50 percentage points. A wider Korea-U.S. rate gap could increase capital outflow concerns and cause the won-dollar exchange rate to surge again.

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the regular Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul on the 23rd. Photo by Joint Press Corps

◆Possibility of Raising Terminal Rate Emerges= Although the BOK kept the base rate unchanged as expected this month, market focus is on the terminal rate and its duration. Opinions are divided between those who believe the rate hike cycle is concluding with this freeze and those who see the possibility of further hikes depending on rate moves by the U.S. and other major countries.

Kim Sung-soo, an analyst at Hanwha Investment & Securities, said, "Most Fed officials advocating aggressive rate hikes do not have voting rights this year, while many voting members are cautious about future monetary policy. If the interest rate gap between Korea and abroad widens beyond 2.0 percentage points, the BOK may consider additional hikes. However, past cases show that the interest rate gap does not have an absolute impact on exchange rates or foreign capital flows, so 3.5% is likely to be the terminal rate."

On the other hand, Joo Won, head of economic research at Hyundai Research Institute, said, "Domestic inflation remains high at around 5%, and with the Fed expected to raise rates twice more in March and May, the BOK may also raise rates by 0.25 percentage points." He predicted, "In the fourth quarter, when the need to stimulate the economy increases, the BOK will begin cutting rates to ease the high interest burden on households and businesses."

Regarding this, Governor Lee said at a press conference, "I hope this rate freeze is not interpreted as the end of the rate hike trend. Last year, inflation surged unusually, prompting rate hikes at every meeting, but before that, it was common to raise rates and then take time to review the need for further hikes." He asked that this decision be understood as a return to that usual approach.

Governor Lee also indicated the possibility of further hikes, stating, "One MPC member supports maintaining the current 3.5%, while five members believe the possibility of raising it to 3.75% should remain open."

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