BOK holds policy rate at 3.50% amid inflationary pressures

BOK Governor Rhee Chang-yong. [Photo by Pool Photo]

The Bank of Korea (BOK) has decided to keep its benchmark interest rate at 3.50 percent, maintaining its monetary tightening stance as inflation concerns rise.

The central bank made the decision to hold rates steady during its third policy meeting in 2024 on Friday. It is the 10th consecutive hold since February 2023, with the rate remaining unchanged for over 14 months.

The BOK seems to believe that a rate hold was inevitable due to uncertainties stemming from conflicting factors such as inflation, household debt, real estate project financing (PF) and economic growth.

[Graphics by Song Ji-yoon]

In particular, the consumer price index, a key indicator for monetary policy, was at 3.1 percent in both February and March 2024, up from January’s 2.8 percent, mainly due to price increases in agricultural products. Escalating tensions between Israel and Iran have also pushed international oil prices to around $90 per barrel, adding to inflationary pressures.

Domestically, the level of household debt and the concentration of real estate investment relative to the size of the economy remains persistently high despite a decline in domestic household credit in February and March 2024. This was highlighted by the ratio of household credit to nominal GDP of 100.6 percent at the end of the fourth quarter of 2023 and has forced the central bank to refrain from lowering interest rates.

During an earlier briefing on household credit held on Thursday, the BOK mentioned the potential for an increase in credit driven by expectations of a rise in property values triggered by any prospective changes in the policy rate.

[Graphics by Song Ji-yoon]

Although raising the benchmark interest rate could help suppress inflation and mitigate household debt concerns, it is viewed as unfeasible due to the associated risks of defaults on real estate PF loans and consumption contraction, which could jeopardize the central bank‘s target growth rate of 2.1 percent for 2024.