BOK raises GDP growth forecast to 2.5%, holds interest rate steady

The Bank of Korea (BOK) upped its growth forecast for the country's economy by 0.4 percentage points to 2.5 percent on the back of strong exports. Inflation is expected to come at 2.6 percent this year, unchanged from the previous projection.

Bank of Korea Gov. Rhee Chang-yong at the Monetary Policy Board meeting in central Seoul on Thursday [BANK OF KOREA]

The Bank of Korea (BOK) raised its growth forecast for the country's economy by 0.4 percentage points to 2.5 percent, thanks to strong exports driven by robust chip demand. Inflation is expected to come in at 2.6 percent this year, unchanged from the previous projection.

The latest revisions coincided with the central bank's rate-setting meeting on Thursday, during which the interest rate was kept unchanged at 3.50 percent for the 11th straight meeting.

The stronger-than-expected growth in Korea's GDP in the first quarter is increasing the possibility of further delays in rate cuts this year.

Korea's GDP advanced 1.3 percent in the January-March period from the previous quarter, according to the central bank's preliminary estimate announced on April 25. It marked the steepest growth since the fourth quarter of 2021 and surpassed the market expectation of 0.6 percent.

Meanwhile, the U.S. Federal Reserve is expected to keep its interest rate at the current level of 5.25 to 5.5 percent for longer, a 23-year high. Minutes from the U.S. rate-setting meeting in May, released Wednesday, showed that officials remained concerned with stubbornly strong inflation data, even indicating the possibility of further monetary tightening.

"Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate,” read the minutes.

Korea’s headline inflation slightly decelerated in April, with consumer prices increasing at a relatively milder pace of 2.9 percent on year compared to the previous month’s 3.1 percent.

According to a survey by the Korea Financial Investment Association (Kofia) released on Tuesday, 98 percent of bond experts, including analysts, expected the BOK’s Monetary Policy Board to hold the rate steady. Ahead of the previous rate-setting meeting in April, 98 percent of bond experts also expected a rate freeze.

Of the respondents, 1 percent forecast a 25-basis-point rate cut, and the remaining 1 percent expected a 50-basis-point cut.

"With the consumer price increase rate hovering above the target of 2 percent and the U.S. Fed expected to further delay rate cuts, the expert consensus was on a rate freeze for the May rate-setting meeting,” Kofia said.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]