6 Consecutive Base Rate Holds... BOK at a Crossroads of Growth Rate and Inflation (Update)

Financial Monetary Policy Committee Meeting on the 19th
High Uncertainty in US Monetary Policy
Interest Rates Held Steady Amid Israel-Palestine War Variables

Lee Chang-yong, Governor of the Bank of Korea, is putting down the gavel at the Monetary Policy Committee meeting held on the 19th at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

Amid growing concerns over an economic recession, the Bank of Korea (BOK) decided on the 19th at the Monetary Policy Committee meeting to keep the base interest rate steady at 3.5% per annum for the sixth consecutive time. Given the unexpected variable of the Israel-Palestine war and ongoing uncertainties in U.S. monetary policy, the BOK intends to maintain the current rate and observe future trends.

In particular, although there are concerns about the widening interest rate gap between South Korea and the U.S., the significant uncertainty surrounding domestic economic recovery and the substantial increase in financial interest burdens have made it difficult to implement additional rate hikes. Contrary to the government's 'low in the first half, high in the second half' economic outlook, the recovery strength of the Korean economy has not been clear since the fourth quarter, and the continued impact of China's economic downturn has reduced the necessity for further tightening.

At the monetary policy direction decision meeting held on the 19th, the BOK's Monetary Policy Committee decided to keep the base interest rate at 3.50% per annum. The committee had halted the rate hike trend that lasted for one year and six months since August 2021 in February, and this marks the sixth consecutive freeze following the previous August. With the BOK freezing the base rate this month, the interest rate gap with the U.S. (5.25?5.50%) remains at a record high upper limit of 2.00 percentage points.

One reason behind the BOK's decision to freeze rates this month is that although inflation has recently rebounded, it has not significantly deviated from the BOK's forecast in the broader trend. However, the recent rapid developments in the Israel-Palestine war have intensified volatility in international oil prices, raising concerns that inflation could be further stimulated. Additionally, uncertainties in U.S. monetary policy have not fully dissipated, and domestic economic instability continues, so the BOK's stance is to freeze the base rate and monitor future inflation trajectory.

In particular, the recent rise in international oil prices acts as a negative factor causing both inflation and economic recession simultaneously. Professor Seok Byung-hoon of Ewha Womans University’s Department of Economics explained, "If oil prices rise due to the Israel-Palestine war, production costs for companies increase, which partly passes on to prices, but it does not end with inflation. Companies reduce some production to minimize profit losses caused by higher production costs," adding, "Since Korea imports all its energy, an increase in oil prices raises energy import costs, reducing net exports and worsening the trade balance, which inevitably lowers the gross domestic product (GDP) growth rate."

From the BOK’s perspective, arbitrarily raising the base interest rate by focusing solely on inflation could deepen the economic recession, so it chose to keep the rate steady. Although the consumer price inflation rate rebounded to 3.7% year-on-year in September, the core consumer price index, which reflects the effect of monetary policy, has remained at a similar level for three consecutive months and shows a downward trend, indicating that the current base rate is sufficiently tight, which also supports the decision to hold the rate.

Furthermore, the recent sharp increase in financial interest burdens, raising concerns about worsening household debt defaults, is also cited as a reason for the freeze. Professor Seok said, "Although household and corporate debt delinquency rates are still low, delinquency rates for all loans are rapidly increasing," adding, "Delinquency rates for real estate project financing (PF) are also rising quickly, so if the base rate is further increased, the burden of principal and interest repayments will grow, increasing delinquency rates and potentially triggering financial instability." This is seen as a factor that would simultaneously reduce consumption and investment, further exacerbating the economic downturn.

Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "The BOK is hesitant due to the accumulated high private debt," and "With the Financial Supervisory Service and others controlling bank loan expansions, if financial regulations continue at the government level, the justification for raising rates may diminish." Professor Ha added, "If GDP growth follows the 'low in the first half, high in the second half' pattern, the BOK might have room to raise rates once, but domestic demand is the issue," noting, "Although exports are showing signs of gradual recovery, consumption is not increasing, and the government is not actively increasing fiscal spending, so the current situation of freezing the base interest rate is expected to continue for the time being."

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