BOK to maintain monetary tightening despite U.S. Fed's coming cuts

Korea's central bank will maintain its current monitory tightening stance despite the U.S. Fed pivoting toward lower interest rates.

BOK Governor Rhee Chang-yong speaks during a meeting of financial authorities in central Seoul Thursday, following the U.S. Fed's monetary decision. [YONHAP]

Korea's central bank will maintain its current monetary tightening stance despite the U.S. Fed pivoting toward lower interest rates.

In its latest policy report released Thursday, the Bank of Korea (BOK) cited persistently high inflation and increasing household debt as the basis for the future direction. The BOK said the inflationary trajectory is expected to be higher than expected, and will maintain its tightening mode for a "sufficiently" considerable time until it is assured that inflation is in line with its target level.

"The Bank of Korea will implement its policy in a way that inflation stabilizes at the target level (2 percent) while checking growth trends and financial stability. The bank will continue its restrictive policy stance for a considerable time with a focus on stabilizing price levels and will judge whether an additional rate hike is necessary," the bank said in the report.

The U.S. Fed held its benchmark lending rate steady Wednesday for a third consecutive time and signaled at least three rate cuts next year.

The BOK said it will analyze the pace of the slowdown in inflation, economic downside risks, household debt trends and moves in other major economies when it considers interest rates.

Inflation grew at a slower pace last month, though it stayed above 3 percent for the fourth consecutive month amid high prices for energy and farm goods.

Consumer prices, a key gauge of inflation, rose 3.3 percent in November from a year earlier, compared to a 3.8 percent on-year increase the previous month, marking the first time in four months that the annual price growth has eased.

Last month, the BOK kept its key interest rate unchanged at 3.5 percent for the seventh straight time. The central bank also delivered seven consecutive rate hikes from April 2022 to January 2023.

The central bank assessed that it is uncertain that inflation will be approaching its target level given uncertainties over a rise in public service fees and other costs.

Last month, the bank jacked up its inflation forecast for next year to 2.6 percent from its earlier estimate of 2.4 percent.

The central bank said an economic recovery will be led by exports on the back of a rebound in the semiconductor sector despite a delayed improvement in private spending.

A protraction of restrictive steps in major economies, a weaker than expected recovery in China and a milder than thought recovery in private spending could pose downside risks to Korea’s economy, the bank said.

The central bank has maintained its growth estimate for the year at 1.4 percent but dropped next year's to 2.1 percent from 2.2 percent.

"Rising household and corporate debts could undermine financial stability amid climbing delinquency rates," the bank said.

Meanwhile, Finance Minister Choo Kyung-ho said that the government will closely monitor finance and currency exchange markets and implement measures accordingly to stabilize financial markets in light of the Fed’s decision.

"Recently, the [Korean] financial market, including the stock and foreign exchange markets, has mirrored the trends observed in major economies while maintaining stability," the Finance Ministry said.

"The government and the Bank of Korea plan to stay vigilant, managing risks in vulnerable areas to prevent the growth of market volatility at the year's end and the beginning of 2024," he said.

BY PARK EUN-JEE, YONHAP [park.eunjee@joongang.co.kr]