BOK freezes rate for 3rd straight time

May 26, 2023, 08:05 am

AsiaToday reporter Jeong Geum-min

South Korea’s central bank has lowered its economic growth forecast for this year to 1.4 percent from 1.6 percent Thursday, freezing its key interest rate steady at 3.5 percent for the third consecutive time. It lowered its real GDP growth forecast as exports continued to remain sluggish and consumption recovery slowed. As a result, market watchers say that the central bank’s rate hike cycle is virtually reaching its end.

The monetary policy board of the Bank of Korea (BOK) decided to keep the benchmark interest rate unchanged at 3.5 percent during a monetary policy meeting on Thursday. This marked the third consecutive freeze decision following a rate freeze in February and another in April.

The move comes amid economic stagnation and slowdown in consumer prices. In the aftermath of sluggish exports, the economy grew 0.3 percent in the January-March period from the previous quarter. The country reported a current account deficit of $4.46 billion in the first quarter, marking the first time for a deficit on a quarterly basis in 11 years. This is why the BOK has no choice but to focus on financial stability as well as responding to the economic slowdown.

Some observers said the biggest U.S.-Korea interest gap of a record 1.75 percentage points affected the latest rate freeze. However, the central bank seems to have judged that it is tolerable as there has been no weakening of the won nor outflow of foreign capital. The pace of consumer price growth, which was the biggest pending issue, softened to a 14-month low of 3.7 percent last month.

However, the BOK left the door open for possible rate hikes. “We can say that it is too early to mention the timing of a rate cut until there is data that shows inflation surely approaches 2 percent,” BOK Gov. Rhee Chang-yong said. “All six monetary policy committee members left the door open to raise the final interest rate to 3.75 percent per year,” he said.

The BOK Governor added that the bank has to assess the impact of the U.S. Fed’s rate policy on the foreign exchange market, and that the possibility of a rate hike should be left open.

Regarding lowering the country’s growth rate for 2023 to 1.4 percent from 1.6 percent, Rhee said, “We lowered the growth rate projection as the IT industry is slow to rebound and the effects of China’s reopening have been delayed than initially expected.”

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