The Bank of Korea's Monetary Policy Committee Holds Base Rate at "3.50%" for 10th Consecutive Time (Update)

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee meeting held on the 12th at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

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The Bank of Korea has kept the base interest rate steady at 3.50% per annum. This marks the tenth consecutive hold since February last year.

The Monetary Policy Board (MPB) of the Bank of Korea announced on the 12th at 9 a.m. during a monetary policy meeting held at the Bank’s headquarters in Jung-gu, Seoul, that the current base rate (3.50% per annum) would remain unchanged.

The reason the Bank of Korea maintained the base rate at this MPB meeting is due to significant concerns over persistent inflation. The inflation rate stayed in the 3% range for five consecutive months until December last year (3.2%), then dropped to the 2% range in January, but rebounded to 3.1% in February and March due to a sharp rise in agricultural product prices. Additionally, recent increases in international oil prices have added to the uncertainty going forward. Governor Lee Chang-yong expressed his personal view at a press conference following the February MPB meeting that it would be difficult to lower the base rate in the first half of the year.

Due to rising international oil prices and exchange rates, it is expected to take more time until the "last mile" (the period until inflation reaches the target) is completed. The Bank of Korea had forecast international oil prices to be in the low to mid-$80 range per barrel in February, but prices recently surged to the $90 range per barrel. The exchange rate also surpassed 1,360 KRW, hitting an intraday high not seen in 17 months, contributing to higher import prices.

The delay in the timing of interest rate cuts in the United States is another reason for the hold. South Korea’s interest rates are significantly influenced by movements in the U.S. On the 10th (local time), minutes from the U.S. Federal Reserve’s March Federal Open Market Committee (FOMC) meeting revealed that members considered it inappropriate to cut rates until there was stronger confidence that inflation was moving steadily toward 2%. Although there was market consensus that if the U.S. cut rates around June, South Korea would likely follow with cuts around July, the reduced likelihood of a June cut in the U.S. means South Korea’s base rate is expected to remain on hold for the time being.

For South Korea to begin easing monetary tightening, the U.S. must first lower its base rate and inflation must stabilize concurrently. Professor Kang Sung-jin of Korea University’s Department of Economics said, "Once there is confidence that inflation is falling to the 2% range, discussions about rate cuts will arise, but agricultural and marine products and oil prices are having a significant destabilizing effect. Due to the exchange rate, it seems likely that rate cuts here will only be possible after the U.S. lowers its rates."

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