MNI BOK WATCH: Rate Steady At 3.5%, Restrictive Stance Intact

The Bank of Korea Thursday decided unanimously to keep its policy interest rate unchanged at 3.5% for the fourth consecutive meeting, amid growing concern over the weaker economy due to sluggish exports.

The decision was widely expected as the country suffered from a slower economy due to weaker exports and as inflation has fallen steadily (see: MNI BOK WATCH: Rate Likely On Hold At 3.5%, Policy Focus Shift).

BOK Governor Rhee Chang-yong ruled out an imminent rate cut, noting the Board wanted to maintain the restrictive policy stance for a considerable time and the government remained vigilant against future inflation. “Although inflation has slowed, it is forecast to pick up again to around the 3% level since August and to remain above the target level for a considerable time,” Rhee said.

The BOK expects considerable time before inflation reaches the target level, he added. “In this process, the Board will judge whether the Base Rate needs to rise further while thoroughly assessing the pace of inflation slowdown, financial stability risks, economic downside risks, and monetary policy changes in major countries and its effects on the foreign exchange sector,” the governor said.

OUTLOOK

The governor said consumer price inflation for 2023 will likely generally align with the May forecast of 3.5%. “Core inflation is projected to maintain its slowing trend in the second half as well, but is expected to be slightly above the previous forecast of 3.3% this year due to accumulated cost pressures and favorable demand in services,” he noted.

The governor also voiced concern over financial anxiety following past rate hikes. “Liquidity risks increased at some non-bank institutions due to the rapid rise in delinquency rates and ensuing fears, but then have subsided,” he continued. “Domestic economic growth is projected to recover gradually, as exports improve due to the easing of the sluggishness in the IT industry and as consumption continues its modest recovery."

However, the governor expressed concern for H2, noting the growth rate for H1 will likely print slightly above the original forecast due to the easing of sluggish exports. Uncertainty over H2's growth were growing thanks to China's slow recovery, he added.