The Bank of Korea (BOK) has decided to maintain its benchmark interest rate at 3.50% for the sixth consecutive time. This move comes as the South Korean economy experiences a slowdown and as uncertainties in the Middle East escalate.
Despite a recent increase in inflation, which had been cooling off for several months, the BOK remains unfazed. BOK Governor Rhee Chang-yong stated that the decision was unanimous among the seven-member policy board. However, five members are still open to the possibility of raising interest rates in the future to combat inflation.
Governor Rhee also mentioned that higher oil prices may prompt the central bank to revise its inflation forecast in the upcoming growth outlook update slated for November.
According to a survey conducted by The Wall Street Journal, all 27 analysts predicted no change to the interest rate in October. These analysts expect the BOK to maintain the policy rate until the end of 2023, with a few suggesting possible rate cuts in 2024 to stimulate economic growth and alleviate financial pressures on households.
While headline inflation has increased for the second consecutive month in September due to volatile oil prices, core inflation (excluding food and energy prices) continues to trend downwards.
Despite some recent signs of recovery, South Korea’s economy has been cooling off, with exports experiencing year-over-year declines for 12 months in a row.
In its latest growth outlook released in August, the central bank projected a GDP growth rate of 1.4% for 2023, following a 2.6% expansion in 2022.
The bank anticipates inflation to average at 3.5% this year, surpassing its annual target of 2.0% but easing from the 5.1% recorded last year.
However, the BOK acknowledged that there are increased upside risks to inflation due to higher global oil prices and the Israel-Hamas conflict. Consequently, the bank believes that consumer price inflation may take longer than previously expected to reach its target level.