MNI BOK WATCH: Weak Economy Keeps Stance Restrictive

The Bank of Korea decided unanimously to keep its policy interest rate unchanged at 3.50% for a fifth consecutive meeting on Thursday, and though Governor Rhee Chang-yong said containing inflation remained the priority he did not rule out a rate cut in the coming months to support the weaker economy.

High forecasted inflation, elevated household debt and uncertainty regarding overseas monetary policy drove the widely-expected decision, according to Rhee in a statement. He noted six out of seven members expect one more rate hike, but refrained from sharing his own view, and, did not rule out a possible rate cut this year or before a Federal Reserve rate cut.

Market players had speculated the bank could signal an intent to cut its policy interest rate toward the end of this year or early 2024. Rhee stressed the bank would pay close attention to the outlook for the economy amid China's slowdown and further U.S. Federal Reserve tightening.

“The Board will maintain a restrictive policy stance for a considerable time with an emphasis on ensuring price stability, while making a judgement regarding the need to raise the Base Rate further,” Rhee noted. “In this process, the Board will thoroughly assess the inflation slowdown, financial stability risks, economic downside risks, the effects of the Base Rate raises, monetary policy changes in major countries, and household debt growth.”

HIGH CORE INFLATION

The bank expects consumer price inflation to pick up from August and fluctuate near 3% until the end of 2023, which aligns with initial forecasts, the Governor said. He voiced concern over the high core inflation rate, noting the bank expected a more moderate slowdown than initially projected due to factors, such as accumulated cost pressures.

“The core rate for this year is projected to be 3.4%, slightly higher than the May forecast of 3.3%,” he said. MNI noted earlier in the week high core inflation would feature in the bank's communication. (See MNI BOK WATCH: Rate To Hold At 3.5%; 2024 Easing In Focus)

The bank left its headline inflation rate for 2023 and 2024 at 3.5% and 2.4% unchanged from May's projections and kept its 2023 economic growth forecast at 3.5%, despite lowering its 2024 growth projection to 2.2% from 2.3%. The Board will continue to conduct monetary policy in order to stabilise consumer price inflation at the target level over the medium-term horizon as it monitors economic growth, while paying attention to financial stability, Rhee noted.

The next meeting is scheduled for October 19.