BOK expects slower economic growth for 2023, keeps base rate unchanged

[Courtesy of The Bank of Korea]

The Bank of Korea expects the economy to grow at a slower pace than earlier expected this year as the financial risks in the U.S. and Europe as well as rate hikes globally have increased uncertainties, prompting the Korean central bank to leave the benchmark interest rate unchanged for a second time this year.

The central bank now expects the country’s gross domestic product for this year to be slightly below its estimate of 1.6 percent growth projected in February as interest rate hikes have adversely affected the global economy and semiconductor exports remained weak, Bank of Korea Governor Rhee Chang-yong said Tuesday. For the first quarter, the economy is expected to show a small growth, he said, without elaborating.

The heightened risk in the global financial industry in the U.S. and Europe will have a negative impact on the global economy, although the impact on the local financial industry is limited, Rhee said.

In the second half, Korea’s economy is expected to recover as demand for semiconductors are expected to rebound and China’s re-opening activities take effect, Rhee said.

The central bank’s Monetary Policy Board unanimously decided to keep the base rate at 3.50 percent without any changes from February at a meeting held Tuesday morning to discuss monetary policy directions. The base rate has been unchanged in February and Tuesday, and market insiders are leaning toward the view that this could mark the end of a rate hike cycle.

The central bank of South Korea saw that there is no reason to add pressure by raising the rate given the country’s sluggish exports and in the wake of the collapse of Silicon Valley Bank even as the consumer price inflation has slowed to 4.2 percent in March, the lowest in a year.

The base rate has been raised by a total of 3.00 percentage points between November 2021 and January. However, the rate hike that continued for about a year and a half since August 2021 has practically stopped in February and Tuesday.

The Bank of Korea Governor Rhee Chang-yong [Photo by Joint Press Corps]

BOK’s decision to freeze the rate again is largely attributable to the recently slowing inflation. Rhee said Tuesday that “inflation will continue to slow and is expected to fall to the 3-percent level in the second quarter,” reiterating that the annual inflation could reach 3.5 percent. “Still, uncertainties remain.”

Worsening economic indices have also likely contributed to the decision. Korea’s real gross domestic product growth had already fallen to the negative territory to minus 0.4 percent in the fourth quarter from the previous three-month period on sluggish exports and it is not likely to rebound in the first quarter. The current account balance suffered a deficit for two straight months in January and February for the first time in 11 years and the trade balance account based on customs clearance has also remained in the red for the 13th month in March at $4.62 billion.

Views predicting an end to the central bank’s interest rate hike is expected to gain ground.

“The interest rate hike seems to have ended as the current benchmark rate is already above the neutral level, while inflationary pressures are easing and the economy is showing signs of recession,” said Park Jeong-woo, an economist at Nomura Securities Co.

Yet, the possibility of additional hikes cannot be completely ruled out given the widening base rate gap between Korea and the U.S. The gap with the U.S. remained at 1.50 percentage points following the central bank’s decision Tuesday.

It is already the largest gap in 22 years since October 2000 and even the expected baby steps by the U.S. Federal Reserve to raise the base rate by 0.25 percentage points in May will widen the gap to 1.75 percentage points or higher, which indicates the risk of foreign capital outflows and Korean won depreciation.