BOK holds key rate steady amid inflation, forex concerns

BOK Governor Rhee Chang-yong bangs the gavel to open a Monetary Policy Committee meeting in Seoul on May 23, 2024. [Photo provided by Pool Photo]

The Bank of Korea (BOK) on Thursday maintained the benchmark interest rate at 3.50 percent for the 11th consecutive session amid lingering inflation and exchange rate concerns.

The BOK’s Monetary Policy Board convened its final monetary policy direction meeting for the first half of this year on Thursday and decided to keep the current key interest rate unchanged at 3.50 percent.

The BOK’s move comes after a series of rate adjustments in response to economic challenges.

In March 2020, the BOK implemented a big rate cut of 0.50 percentage points, lowering the rate from 1.25 to 0.75 percent amid the Covid-19 pandemic’s impact.

This was followed by an additional reduction in May of the same year, bringing the rate down to 0.50 percent, a total decrease of 0.75 percentage point within two months.

Subsequently, after nine consecutive freezes, the BOK raised the key rate by 0.25 percentage point on August 26, 2021, marking the first increase in 15 months, signaling a shift towards a tightening monetary policy.

Since then, the key rate has been gradually raised by a total of 3.00 percentage points through various adjustments until January 2023.

However, the momentum of rate hikes was interrupted by a freeze in February last year, maintaining the key rate at 3.50 percent, a level sustained from January 2023 to the present.

The decision to maintain the key rate for about one year and four months reflects the significant impact of inflation and exchange rate uncertainties on the BOK’s monetary policy stance.

[Graphics by Song Ji-yoon]

Despite efforts to rein in inflation, consumer prices remain elevated, with the April inflation rate standing at nearly 3 percent.

Although this figure represents a slight decrease from the previous months, it still exceeds the central bank’s target of 2 percent.

BOK Deputy Governor Kim Woong highlighted the challenges during a recent inflation review meeting, acknowledging the uncertainty surrounding future inflation trends, particularly regarding energy and food prices.

Analysts point out that the recent spike in global oil prices and continued high inflation in the United States have added to the central bank’s caution in adjusting interest rates.

The possibility of early rate cuts by the U.S. Federal Reserve has also diminished, despite market expectations, compounded by geopolitical tensions such as the conflict between Iran and Israel.

Consequently, the Korean won has experienced fluctuations, remaining around the 1,360-won mark against the greenback.

Given the implications of exchange rate fluctuations on inflation management, the exchange rate remains a key consideration in the BOK’s monetary policy decisions.

The BOK, in the meantime, revised its economic growth forecast for 2024, raising it to 2.5 percent from the previous estimate of 2.1 percent, thus removing the rationale for an early rate cut to prevent an economic slowdown.