Korea’s central bank holds rate at 3.5% amid easing inflation, weak economy

2023.05.25 11:40:01 | 2023.05.26 10:11:24

Bank of Korea (BOK) Governor Rhee Chang-yong bangs the gavel to open a Monetary Policy Committee meeting at the central bank in Seoul on May 25. [Photo by Yonhap]이미지 확대

Bank of Korea (BOK) Governor Rhee Chang-yong bangs the gavel to open a Monetary Policy Committee meeting at the central bank in Seoul on May 25. [Photo by Yonhap]

South Korea’s central bank left the benchmark rate unchanged at 3.5 percent for the third straight time on Thursday as the country continues to grapple with a weak economy while inflation shows signs of easing.

The monetary policy board of the Bank of Korea (BOK) held the policy rate steady at 3.5 percent, following the same move in earlier meetings in February and April.

While there are growing expectations that the latest freeze could indicate an end to the BOK’s aggressive rate hikes that began in August 2021 to contain soaring prices amid the pandemic, Governor Rhee Chang-yong said that it’s still open to the possibility of raising interest rate if there is need to do so.

“I have heard there are talk in the market that the central bank is just saying there could be a rate increase but we have left all options open,” Rhee said to reporters. “Inflation and other economic data will determine what action we take.”

Inflation growth fell below 4 percent for the first time in 14 months in April, suggesting that consumer price growth has eased. The economy, however, continues to remain sluggish.

Korea’s real gross domestic product (GDP) gained 0.3 percent in the first quarter from the previous quarter, barely avoiding a contraction thanks to increased private consumption.

The central bank again lowered its economic growth outlook for this year to 1.4 percent from an earlier estimate of 1.6 percent as exports of semiconductors and other IT products have yet to show signs of recovery.

The current account balance in March escaped a deficit on the back of dividends from overseas subsidiaries of domestic companies.

The trade balance, however, has remained in a deficit for the 14th straight month in April.

Market analysts note that the BOK may have taken into consideration also the rising uncertainty in the financial market triggered by the collapse of U.S. Silicon Valley Bank.

Further rate hike pressure can lead to possible insolvency issues at more vulnerable savings banks and credit firms.

Ahead of the monetary policy board meeting, some experts projected that the BOK may raise the benchmark rate by a quarter percentage point to reduce the gap between its rate and that of the U.S. Federal Reserve that has widened to an all-time high of 1.75 percentage points.

The BOK is judged to have kept the rate steady as there have been no clear signs of a weakening won or foreign capital outflow as a result of the widened rate gap with the U.S.

The U.S. Federal Reserve is largely expected to keep its policy rate unchanged in June, lifting concerns about an even wider gap.

The U.S. funds rate stands at a target range of 5~5.25 percent.

By Pulse

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