Rate freeze does not mean end of tightening cycle: BOK governor

The Korea Times

The Korea Times

Finance

Tue, September 26, 2023 | 08:57

Economy

Rate freeze does not mean end of tightening cycle: BOK governor

Posted : 2023-02-23 16:55

Updated : 2023-02-24 15:02

Bank of Korea (BOK) Governor Rhee Chang-yong bangs his gavel before the members of the BOK monetary policy board during a rate-setting meeting at the central bank in downtown Seoul, Thursday. Yonhap

Central bank freezes key rate at 3.5%, lowers growth outlook to 1.6%

By Yi Whan-woo

The Bank of Korea (BOK) kept the key interest rate unchanged at 3.5 percent, Thursday, halting a monetary-tightening campaign that lasted more than a year amid mounting woes over slowing economic growth.

The central bank also lowered its 2023 economic growth outlook for Korea to 1.6 percent from 1.7 percent, while reducing the inflation forecast to 3.5 percent from 3.6 percent.

BOK Governor Rhee Chang-yong said the rate freeze should not be seen as an about-face in fiscal policy and stressed that the move was decided by taking into account this year's course of inflation as forecast by the central bank.

The freeze reversed a tightening cycle that began in August 2021, including seven straight rate hikes between April 2022 and January this year that saw a combined 3-percentage-point increase in the base rate. The current rate stands at the highest level in more than 10 years.

"The rate freeze does not mean we have sacrificed the fight against inflation for growth," Rhee said during a press conference after the rate-setting meeting.

He stressed that it is too early to discuss whether to drop the policy rate, and at the same time, left the door open to increasing the rate to 3.75 percent depending on inflation, the housing market, the U.S. interest rate and other relevant factors.

In a press release, the BOK's monetary policy board forecast inflation will continue to be above the target level throughout the year, although it is projected to gradually decrease.

"The board, therefore, sees that it is appropriate to judge whether the base rate needs to rise further while assessing the pace of inflation slowdown and developments in uncertainty," it said.

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Analysts, however, said the BOK was more concerned about sharply slowing growth than persistently-high inflation in its monetary policy due to sluggish exports and private spending ― the two main drivers of growth.

Exports fell for the fourth consecutive month in January when they declined 16.6 percent year-on-year. The Composite Consumer Sentiment Index (CCSI), which estimates future private spending, dropped by 0.5 percentage point to 90.2 points between January and February.

Some observers even say the country's economy can post a second consecutive negative quarterly growth after contracting 0.4 percent in the final three months of 2022.

Inflation concerns still remain as the producer price index, a major gauge of consumer inflation, rose 0.4 percent in January from a month earlier, according to the BOK's preliminary data.

The 0.4 percent increase marks a three-month high and was mainly attributable a 10.9 percent increase in electricity rates.

Bank of Korea (BOK) Governor Rhee Chang-yong speaks during a press conference after the BOK's rate-setting meeting at the central bank in downtown Seoul, Thursday. Yonhap

"Taking the circumstances on growth and inflation into account, the BOK monetary policy board members were believed to be more worried about the adverse effects of a growth slowdown than that of inflation," said Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI).

Korea University economics professor Kim Dong-heon said, "It appears the BOK will monitor the economic situation for the time being by freezing the rate, because the decline in exports and consumer expenditures can further dent the economy."

Meanwhile, the analysts said a rate freeze leads to prolonged concerns over a widening interest rate gap between Korea and the United States, with the U.S rate standing in a range of 4.5 percent to 4.75 percent.

The maximum 1.25-percentage-point gap between the two countries is the highest in 22 years and will grow wider if the U.S. Federal Reserve delivers a rate hike in its upcoming meeting scheduled from March 21 to 22.

Backed by solid U.S. job growth data, the Fed is expected to raise its policy rate at least two more times to the 5 percent-5.25 percent range. According to the Federal Open Market Committee's (FOMC) February minutes released on Wednesday, almost all Fed officials supported a 0.25-percentage-point hike next month.

"The BOK can come up with an additional hike if the won-dollar exchange rate rises above the 1,300 level and prompt fears of a cash outflow in search for safe haven assets," the KERI researcher said.

yistory@koreatimes.co.kr