Monetary Policy Board Freezes Base Interest Rate at 3.5% for the Third Time, But Lowers This Year’s Growth Prospect to 1.4%

Bank of Korea Governor Rhee Chang-yong presides over a meeting of the Monetary Policy Board at the Bank of Korea in Jung-gu, Seoul on the morning of May 25. Courtesy of the Bank of Korea

The Monetary Policy Board of the Bank of Korea froze the base interest rate for the third consecutive time. The central bank slightly lowered its real GDP growth prospect for this year to 1.4%, while maintaining its 3.5% forecast for inflation.

On May 25, the Monetary Policy Board met to discuss the direction of the nation’s monetary policy at the Bank of Korea in Jung-gu, Seoul and decided to keep the current annual rate of 3.5%.

Recently, inflation, which has been a key factor in the central bank’s monetary policy, has been slowing down, so the Board may have decided it would be better to determine the effects of the monetary tightening while maintaining the current direction. In April, the inflation rate dropped to 3.7%, and the expected inflation for May has also dropped to 3.5%. However, there is always the possibility that the rise in public utility prices such as power and gas could push prices up. In a parliamentary questioning before the Strategy and Finance Committee at the National Assembly on May 22, Bank of Korea Governor Rhee Chang-yong said, “Since the current consumer prices are higher than our target, we will continue to implement a monetary policy focusing on the inflation.”

There was also the concern that raising the base rate excessively when the pressure of inflation was easing could accelerate the economic downturn. On Thursday, the Bank of Korea lowered its prospects for economic growth this year by 0.2% to 1.4% from its forecast in February (1.6%). The latest forecast was lower than 1.5%, the dominant projection among domestic and international institutions recently.

In the first quarter, South Korea’s real GDP barely managed to grow 0.3% from the previous quarter thanks to private consumption, and the current account continued to move back and forth between small deficits and surpluses maintaining a balance. Exports remain sluggish.

The gap in the base interest rates between South Korea and the United States widened up to a record-breaking 1.75%, butthe value of the won against the dollar has not been too volatile, weakening the need to rase the interest rate.

Now that the central bank has frozen the base rate, the market is expected to focus on when the Monetary Policy Board will consider the possibility of lowering the rate.