The Bank of Korea Holds Interest Rates Again... Will Consumption Revive Amid High Rates?

As the Bank of Korea has kept interest rates unchanged for eight consecutive times, there is a forecast that the high interest rate of 3.5% will be maintained until the first half of this year. With inflation still high and interest rates maintained at elevated levels, attention is focused on whether consumption, which the government is emphasizing in this year's economic policy direction, will revive. The government expects the impact of the interest rate hikes to continue until the first half of this year.

On the 11th, the Bank of Korea held a Monetary Policy Committee meeting and kept the base interest rate at 3.5%. Since February last year, the Bank of Korea has maintained a policy of holding interest rates steady for nearly a year. This stance is expected to continue going forward. At a press conference immediately after the Monetary Policy Committee meeting, Lee Chang-yong, Governor of the Bank of Korea, said, "Personally, I think it will be difficult to lower the base interest rate for the next six months."

Lee Chang-yong, Governor of the Bank of Korea, is attending the first Monetary Policy Committee plenary meeting of the new year held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 11th, and is striking the gavel. Photo by Joint Press Corps

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Lowering interest rates is essential for revitalizing domestic demand and consumption. Kang Sung-jin, a professor of economics at Korea University, said, "To stimulate domestic demand, interest rates fundamentally need to be lowered. However, a shift in monetary policy is difficult at the moment." This is due to high inflation. Governor Lee conveyed the remarks of the Monetary Policy Committee members, saying, "All five members agreed to maintain the base interest rate at 3.5% this time and to sustain it for a long period to establish a foundation for price stability. They expressed that it is important to stabilize prices by maintaining a tightening stance for a considerable time rather than now."

Although the government has introduced numerous consumption stimulation measures in the 2024 economic policy direction to revive domestic demand, it is uncertain whether these will have an impact in the current high interest rate and high inflation environment. The government also expressed concerns about sluggish consumption in the 'January Recent Economic Trends (Greenbook)'. While the recovery in the economy is spreading due to increased exports, there is a time lag before the warmth reaches the consumption sector. The Bank of Korea also expressed concerns about growth polarization and the polarization between domestic demand and exports in its Q&A session.

In particular, the government diagnosed that the impact of high interest rates could affect consumption until the first half of this year. Lee Seung-han, Director of the Comprehensive Policy Division at the Ministry of Economy and Finance, said at a briefing for reporters, "From the consumption perspective, the two major factors significantly affecting it are high inflation and high interest rates. The Bank of Korea sharply raised the base interest rate by 150 basis points (1bp = 0.01 percentage point) three times from July to October 2022, and the peak impact of high interest rates on consumption is from the second half of last year to the first half of this year, which is one and a half years after that period."

He added, "Therefore, private consumption is likely to remain sluggish until the first half of the year," and "The reason why the Greenbook included the phrase 'private consumption slowdown,' which was not present until last month, is because of this." The government plans to prevent consumption slowdown as much as possible and activate the perceived economy through measures such as advance payments and pre-purchases, as well as tax benefits in the first half of the year.

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