Korea’s central bank warns negative economic growth in Q4 highly likely

Rhee Chang-yong on Friday expected the economy to post a negative growth in the fourth quarter [Photo by Yonhap]

(Updated with BOK governor’s comments)

Bank of Korea (BOK) Governor Rhee Chang-yong on Friday expected the economy to post a negative growth in the fourth quarter due to unfavorable factors such as weak chip demand and Covid-19 infections in China, although it will be able to report 2.6 percent growth for full year.

“The possibility of a negative growth has become larger,” Rhee told reporters after the central bank took a baby step of raising the base rate by 25 basis points in this year’s first hike amid rising prices and prospects for a continued rate increase by the U.S. Federal Reserve.

“We will be announcing fourth-quarter growth in two weeks,” Rhee said. “Indices remain weak due to a rise in Covid-19 infections in China, a fall in chip demand and Itaewon crowd crush.”

According to the BOK, the Korean economy grew 0.6 percent in the first quarter last year from the previous quarter, 0.7 percent in the second quarter and 0.3 percent in the third quarter. The central bank expected 2022 growth at 2.6 percent even if the economy in the fourth quarter contracts.

Rhee also warned that the economic growth this year could fall below its November projection of 1.7 percent, although there are several upside factors in the first quarter such as possible upward revision in growth in the U.S. and Europe.

The BOK raised the policy rate by 25 basis points to 3.50 percent [Photo by Yonhap]

The BOK in the year’s first rate-setting meeting on Friday raised the policy rate by 25 basis points to 3.50 percent, following the same rise in November that had left the base rate at an 11-year high.

The BOK began raising the benchmark rate in August 2021 from a record low of 0.50 percent. The rate rose by an unprecedented 50 basis points twice last year - to 2.25 percent in July from 1.75 percent in May and 3.00 percent in October from 2.50 percent in August.

The benchmark Kospi rose 0.9 percent to 2,386.31 as of 12:45 p.m. Friday. The U.S. dollar fell 4.6 won to 1,243.4 won.

The hike comes as inflationary pressure keeps on building up, with prices of gas, electricity and other public utility bills rising. Consumer prices rose 5 percent on year in December, gaining more than 5 percent for eight straight months, and 5.1 percent for the full year in 2022, the fastest pace since 1998.

The U.S. Federal Reserve is also expected to deliver an additional interest rate hike later this month, although the pace could slow from 2022. The federal funds rate is at 4.25 percent~4.50 percent after the Fed raised rates by 50 basis points in December. A lower base rate than the U.S. prompts concerns about the won’s depreciation and foreign capital flight.