BOK holds benchmark rate for the 6th time as economic outlook remains bleak

Bank of Korea Gov. Rhee Chang-yong [Photo by Joint Press Corps]

South Korea’s central bank on Thursday kept the policy rate unchanged for a sixth consecutive time at 3.5 percent amid sluggish consumption and weak growth in major economies suggesting a bleak outlook for an economic recovery.

The Bank of Korea (BOK)’s monetary policy board left the rate at 3.5 percent, noting that “uncertainties regarding the future path of inflation and growth have risen significantly due to a prolongation of restrictive monetary policy stances in major countries and heightened geopolitical risks.”

“It is forecast that the pace at which inflation will slow down is moderately higher than previously expected, and it is necessary to monitor household debt growth,” it added.

The BOK took a big step In March 2020 when it lowered the benchmark rate by 50 basis points to 0.75 percent from 1.25 percent as it projected a weak economy due to the Covid-19 pandemic.

In May of the same year, it cut the rate further from 0.75 percent to 0.5 percent.

The BOK began to normalize its monetary policy by raising the base rate by 25 basis points for the first time in 15 months in August 2021. The central bank then raised it by 25 basis points eight times and 50 basis points two times between November 2021 and January 2023.

The BOK, however, froze the rate in February and has been left it at 3.5 percent for about nine months.

The benchmark Kospi was trading 1.85 percent lower at 2,417.07 as of noon on Thursday.

“The currently available information suggests that uncertainties regarding economic and inflationary trends have increased across the global economy,” the BOK said. “Global economic growth is expected to continue to be slow.”

When it comes to consumer price inflation, the central bank projected that the figure would fall to the lower 3 percent range at the end of 2023 and continue to gradually moderate in 2024.

Surging international oil prices, exchange rates, and the Israel-Hamas conflict, however, are upward risk factors leading to a higher possibility for a delay in reaching its inflation target of under 3 percent.

Regarding growth, the BOK noted that Korea’s gross domestic product (GDP) growth is “expected to be generally consistent with the August forecast of 1.4 percent” but uncertainties remain due to heightened geopolitical risks.

“The board will maintain a restrictive policy stance for a considerable time with an emphasis on ensuring price stability,” it said.