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Bank of Korea Holds Base Rate at 3.50% Amid Inflation Concerns

Source: Bank of Korea

Bank of Korea's Monetary Policy Board Maintains Key Rate Amid Inflation, Economic Concerns.

Why It Matters: The Bank of Korea's Monetary Policy Board (MPB) maintained its key interest rate at 3.50%.

The decision comes at a crucial time of projected inflation increases and evolving global economic trends and demonstrates the Bank's commitment to stabilizing consumer price inflation.

The Key Points

  • Despite the recent decline in inflation, it's expected to return to around 3 percent from August and remain above target for an extended period. This projection leads the MPB to maintain its current restrictive policy stance. The policy stance will be reassessed based on the evolution of domestic and international conditions.
  • Global economic growth has exceeded expectations, although the pace has varied across countries. Influences such as higher interest rates have led to predictions of a gradual slowdown in global growth. This economic shift has led to a rise in government bond yields and a weakening of the U.S. dollar due to slowing U.S. inflation.
  • Domestically, South Korea's economic growth has improved slightly as the decline in exports has slowed. Positive developments have been observed in the labor market, including higher-than-expected employment rates.
  • The Bank of Korea expects a gradual recovery, with GDP growth in 2023 expected to align with the May forecast of 1.4%.

The Big Picture: While economic growth forecasts appear encouraging, inflation rates remain a concern.

Consumer price inflation fell sharply from 3.3% in May to 2.7% in June, primarily due to lower prices for petroleum products and a slowdown in price increases for personal services.

The rate is expected to decelerate through July, pick up from August, and hover around 3 percent for the rest of the year.

In financial markets, the exchange rate of the Korean won against the U.S. dollar has fluctuated sharply.

Yields on Korean government bonds have also risen, influenced by changes in the monetary policy expectations of significant countries.

Meanwhile, housing prices in Seoul and surrounding areas have begun to rise, increasing household loan volume, mainly driven by housing-related debt.

In light of these concerns, the MPB decided to keep the policy rate unchanged, emphasizing the importance of maintaining a restrictive policy stance to ensure price stability.

Future policy rate decisions will consider the pace of inflation deceleration, economic risks, and the impact of monetary policy changes in significant countries.