The Bank of Korea Holds Base Interest Rate at 3.5% for 5 Consecutive Times... Growth Rate at 1.4% (Update)

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 24th, striking the gavel. / Photo by Joint Press Corps

On the 24th, the Bank of Korea decided at the Monetary Policy Committee meeting to keep the base interest rate unchanged at 3.5% for the fifth consecutive time and maintained this year's real Gross Domestic Product (GDP) growth forecast at 1.4%, the same as the projection made in May.

As risks originating from China have spread, the outlook for exports in the second half of the year has dimmed for South Korea, which has a high dependence on trade with China. However, since the impact remains limited and the possibility of further tightening by the United States is uncertain, there is an increasing need to maintain a wait-and-see stance. Nonetheless, concerns have been raised that if China's economy?which plays a significant role in the global economy?slows down and this leads to a global recession, the government's 'low in the first half, high in the second half' forecast could be shaken, potentially increasing pressure for interest rate cuts.

The Bank of Korea's Monetary Policy Committee held a meeting on the same day and decided to keep the base interest rate steady at 3.50% per annum. In February, the committee halted the rate hikes that had been ongoing for one year and six months since August 2021, and this month marks the fifth consecutive month of holding the rate steady following last month. With the Bank of Korea maintaining the base rate, the gap between South Korea's rate and that of the United States (5.25?5.50%) remains at a record high upper limit of 2.00 percentage points.

The reason behind the Bank of Korea's decision to hold rates this month is that although inflationary pressures are easing, there are concerns about a possible resurgence. Additionally, with the recent emergence of risks from China expected to impact the economy, it is necessary to maintain a cautious stance for the time being. The consumer price inflation rate slowed to 2.3% in July, but with recent rises in international oil prices, an increase is expected this month. Since the direction of U.S. monetary tightening remains uncertain, the Bank of Korea decided to hold the base rate steady and monitor future inflation trends.

In its revised economic outlook released on the day, the Bank of Korea maintained its consumer price inflation forecast at the current 3.5%. Governor Lee Chang-yong of the Bank of Korea stated during a National Assembly Budget and Accounts Committee hearing on the 22nd, "The consumer price inflation rate was 2.3% in July, and core inflation was 3.3%. There is a possibility that inflation will return to the 3% range in August and September, then gradually decline to below the mid-2% range by the second half of next year."

The growth forecast for this year was also maintained at 1.4%. The government expects exports to turn positive in the second half and show an upward trend, but the effect of China's reopening has been less than anticipated, and the recovery of the semiconductor industry, a key export sector, has been delayed, pushing back the timing of economic recovery.

Kim Jeong-sik, Professor Emeritus of Economics at Yonsei University, said, "Although factors such as rapidly increasing household debt and a rising won-dollar exchange rate support interest rate hikes, the recent spread of risks from China's real estate sector has destabilized the economy, which appears to be the background for the rate freeze. The Bank of Korea will decide on any future rate hikes while closely watching the direction of further tightening by the U.S. Federal Reserve, especially following Fed Chair Jerome Powell's speech at the Jackson Hole symposium on the 25th (local time)."

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