MNI BOK WATCH: Base Rate Likely Steady As Growth Concerns Rise

The Bank of Korea will likely keep its policy interest rate unchanged at 3.5% at its monetary policy board meeting on Thursday as the bank is more worried about a weaker economy than high inflation, observers said.

“The BOK will likely examine the impact of the past rate hikes on its economy amid a slowing global economy, while keeping the policy rate unchanged,” Kota Hirayama, senior economist in charge of emerging economies at SMBC Nikko Securities, said.

Hirayama, however, added that the BOK is unlikely to definitely state its terminal rate or hint at the timing of an end to the tightening cycle that started in August 2021. He added that the bank will leave the door open for another rate hike to underscore its stance of fighting ongoing high inflation.

Three members out of the seven members judged that the current policy rate as appropriate at the January meeting, hinting the end of rate hike cycle. Three other members saw the potential need to raise the policy rate to 3.75%, while one member’s view was unknown. (See MNI BOK WATCH: Hikes to 3.50%, But Flags Caution Ahead)

While most the economists are tipping unchanged policy, there are some who believe the BOK could raise the policy rate to 3.75% as the year-on-year rise in inflation accelerated to 5.2% in January from 5.0% in December.

GROWTH PRESSURED

“The Inflation rate stayed at high levels but the economy is under downward pressure in addition to adjustments in semiconductors,” a person who is familiar with South Korea's economy and monetary policy said. The person added that South Korea’s semiconductor makers continue to be considerably weighed down by weak demand and adjustments in memory chips continue.

The person also said pent-up demand had peaked out, possibly putting downward pressure on the economy. He added that South Korea’s economy will be further hit by the impact of past rate hikes.

South Korea's economy contracted in the fourth quarter of 2022 for the first time since the second quarter of 2020, as it was hit by weakening pent-up demand and weak overseas economies. GDP fell 0.4% q/Q in the October-December period after a 0.3% gain in the third quarter.

The BOK expects the economy to improve in the second half of this year and expects GDP to grow 1.7% this year, down from 2.6% in 2022. However, private economists expect the GDP forecast to be revised down to reflect the impact of higher rates and a slower global economy.