Bank of Korea forgoes further rate hikes for first time in a year

Posted on : 2023-02-24 17:13 KST Modified on : 2023-02-24 17:37 KST
The decision is said to be based on the judgment that interest rates have reached a sufficiently tight level
Bank of Korea President Rhee Chang-yong (courtesy of the BOK)
Bank of Korea President Rhee Chang-yong (courtesy of the BOK)

The Bank of Korea left its key interest rate unchanged at 3.50%, marking the first break from hikes in a year. The central bank also lowered both its inflation and economic growth forecasts for this year, adding some weight to the possibility that the era of rate hikes may be in the rear-view mirror.

However, uncertainties surrounding variables such as utility bills, international oil prices, and the exchange rate remain high, suggesting that the bank should leave the door open for a rate hike to 3.75%.

The Bank of Korea’s Monetary Policy Committee held a meeting on Thursday to determine the direction of monetary policy, during which it moved to keep the key interest at 3.50% per year. This is the first time the bank has left rates unchanged since February 2022, marking a pause in an otherwise continuous stream of rate hikes.

Since raising the benchmark rate from 0.50% to 0.75% in August 2021, the Bank of Korea has raised it by a total of 3 percentage points as of last month. The rate has been hiked seven times in a row, including two “big steps” (0.50-point hikes) since April 2022.

The decision is said to be based on the judgment that interest rates have reached a sufficiently tight level. The Bank of Korea expects consumer price inflation (year-on-year) to fall 4% in March and into the low 3% range by the end of the year. The bank appears to be of the notion that the accumulated rate hikes will be enough to stabilize inflation.

In particular, the bank seemed to judge it to be more appropriate to keep the key rate unchanged until inflation deviates from the expected path than to risk the possibility of a hard landing in real estate finance, which could be triggered by a rate hike.

There was little disagreement between the members of the Monetary Policy Board. The only one advocating a 0.25-point rate hike was Cho Yoon-je, with the rest supporting a freeze.

In a statement about their decision, the board members explained that they think “gauging the need for more rate hikes while reviewing developments that add to uncertainty is more appropriate” than raising the rate at this time.

It’s possible that this rate freeze will spell the end of the phase of hiking rates. The Bank of Korea predicted on Thursday that Korea would see 1.6% growth in its real gross domestic product (GDP) this year and that consumer prices would rise by 3.5%. Both of those figures are 0.1 point lower than projections made in November 2022.

The revised forecast gives the Bank of Korea less reason to raise the benchmark interest rate.

Bank of Korea President Rhee Chang-yong explained that the economic growth rate projection had been raised 0.2 points because of an improved economic forecast for the US, Europe and China but lowered 0.3 points because of poor performance in the IT sector and a slowdown in the domestic real estate market.

But it’s too early to assume that the period of rising interest rates is completely over, and the Bank of Korea emphasized that it would be premature to talk about lowering interest rates.

“This freeze does not signify that our benchmark rate hike policy has ended,” Rhee said, adding that the bank would discuss lowering the rate “when various indicators confirm that the inflation rate is moving toward the long-term goal of 2%.”

By Lee Jae-yeon, staff reporter

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