Bank of Korea holds base interest rate steady at 3.5% and maintains economic growth prospect at 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 August 24. Courtesy of the Bank of Korea

The monetary policy board of the Bank of Korea decided to maintain the base interest rate at an annual 3.5% for the fifth consecutive time. The central bank also kept its economic growth expectation for this year at 1.4%, which they first announced in May.

The monetary policy board held a meeting to discuss the nation’s monetary policy at the Bank of Korea in Jung-gu, Seoul on the morning of August 24 and decided to leave the annual base rate unchanged at 3.5%. This is the fifth time in a row that the board decided to freeze the base rate following its decisions in February, April, May and July this year.

Recently in the financial market, factors supporting an interest rate hike have been emerging, such as increasing household debt and the rising won to dollar exchange rate. There is also the possibility of the gap between the base rates of South Korea and the United States widening even further depending on whether the Federal Reserve, the U.S. central bank, opts for a tighter policy.

However, there is also increasing concern about an economic downturn triggered by China, and the inflation has remained steady. So the board appears to have leaned in favor of keeping an eye on the situation for now. Thus, the monetary policy board seems likely to continue its hawkish stance and keep the base rate steady, keeping the interest rate at the current level for now while calling for the need to sufficiently maintain a tight policy.

Kim Sung-soo, an analyst at Hanwha Investment & Securities said, “Considering the time lag in monetary policies, now is the time when we should begin seeing the effects of the policy,” and argued, “Even if the inflation rate rises slightly in August and September, the likelihood of the slowing trend changing is limited. So I believe it will be enough to just maintain the current tight policy.”