Bank of Korea Holds Rate, Eyes Inflation and Financial Risks

Seoul, South Korea - The Bank of Korea has elected to maintain its base rate at 3.50%, citing the necessity to conduct a more comprehensive assessment of inflationary trends and potential financial stability risks. 

The decision was made considering the necessity of achieving a balance between the deceleration of inflation and concerns pertaining to household debt and foreign exchange volatility.

The rate of consumer price inflation in South Korea declined, reaching 2.4% in June, a decrease from the levels observed in previous months. 

Concurrently, the rate of core inflation remained unchanged at 2.2%. 

The Bank of Korea anticipates inflation to decline below its previous forecast of 2.6% for the year.

Notwithstanding a transient decline in the second quarter, the Bank of Korea maintained its 2024 GDP growth projection at 2.5%. 

The bank identified a discrepancy between the growth of exports and the decline in domestic demand.

The Korean won has been appreciated against the U.S. dollar, which was influenced by the weakness of neighboring currencies and shifts in expectations regarding monetary policy.

 The expansion of household loans persists, driven primarily by borrowing related to housing.

Bank of Korea Governor Rhee Chang-yong indicated that while progress has been made in stabilizing inflation, uncertainties remain. 

Rhee indicated that a reduction in the base rate may be considered at an appropriate juncture in the future, although the precise timing remains uncertain.

The central bank will maintain its restrictive stance while evaluating inflation trends and the potential consequences of rate cuts on financial stability. 

This evaluation will include an assessment of the impact of such cuts on the foreign exchange market, housing prices, and household debt. 

This will facilitate the identification of any potential adjustments to monetary policy that may be necessary.