BOK ups 2024 growth forecast to 2.5% while keeping key rate frozen

The Bank of Korea released a revised GDP projection 0.4 percentage points higher than February's, but kept the key interest rate steady at 3.5 percent.

Bank of Korea Gov. Rhee Chang-yong speaks during a press conference after the Monetary Policy Board meeting held at the central bank's headquarters in Jung District, central Seoul, on Thursday. [JOINT PRESS CORP]

The Bank of Korea (BOK) expects the country’s economy to grow 2.5 percent this year, "a significant increase" from its previous projection of 2.1 percent in February, propelled by robust exports and better-than-expected consumption.

Citing burgeoning inflationary pressure partly driven by a strong economy, the central bank decided to keep its current restrictive policy in place, with the interest rate held steady as widely expected.

The forecast was announced on Thursday following the last rate-setting meeting for the first half of the year, with the BOK’s Monetary Policy Board unanimously deciding to keep its seven-day repurchase rate set at a 15-year high of 3.5 percent, unchanged for the 11th straight meeting.

“Despite slowing inflation, expectation-beating economic growth and increased foreign exchange volatility drove up inflationary pressure, along with persisting geopolitical risks,” said BOK Gov. Rhee Chang-yong during a post-policy meeting news conference in central Seoul.

“It will take some more time for us to be certain as to whether inflation will be able to reach the target level, as upside risks [for consumer prices] have increased since April, and the uncertainties regarding the timing of rate cuts have also increased," with cuts by the U.S. Federal Reserve delayed further.

The governor added that the central bank would begin to consider rate-cut options in the latter half of the year if inflation trends stably toward the 2 percent target range.

One board member said they were open to the possibility of cutting rates in the next three months in response to weak domestic demand, while five others preferred to keep the rate steady for the time being.

Rhee, on his part, ruled out additional rate hike possibilities for now.

“If inflation is far stronger than we expected, we should certainly consider the option, but the possibility of such measures seems low in the current situation," the governor said.

Korea’s headline inflation decelerated slightly 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.

In its revised forecast published Thursday, the BOK expected Korea’s consumer price inflation to fall below 2.5 percent in the latter half of the year. The annual projection for headline inflation was kept at 2.6 percent, and core inflation at 2 percent.

Meanwhile, The BOK raised its forecast for Korea’s GDP growth this year by 0.4 percentage points to 2.5 percent from its previous forecast in February.

For 2025, the GDP growth is estimated to come in at 2.1 percent, down 0.2 percentage points from the February forecast.

The steep increase in this year’s economic growth outlook was primarily attributed to robust exports as well as a decline in imports caused by warm weather during the winter and a consequent fall in energy imports. The trade surplus contributed 0.3 percentage points to the latest 0.4 percentage-point hike.

The stronger-than-expected recovery in domestic demand, including consumption, was responsible for the remaining 0.1 percentage point. However, the increase in consumption still remains sluggish at best, according to the BOK, which is why the central bank’s inflation projection was kept unchanged from the February figure despite the upped growth forecast.

Though a strong economy tends to drive commodity prices upward, the slow recovery of consumption is expected offset the inflationary pressure to a certain extent, the governor explained.

Moreover, “the inflation forecast has not been adjusted because the growth projection was mainly driven by exports, which have a relatively smaller impact on inflation,” according to Rhee.

The BOK’s latest upward adjustment of the growth projection this year follows stronger-than-expected GDP data in the first quarter.

The country'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.

The BOK expects the growth to moderate in the second quarter, before rebounding in the latter half of the year.

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