BOK freezes policy rate amid pandemic, Ukraine crisis
Bank of Korea Gov. Lee Ju-yeol bangs the gavel to open a rate-setting meeting, Feb. 24, in this photo provided by his office. Courtesy of Bank of Korea
The Bank of Korea (BOK) held its key interest rate steady Thursday amid worries that the upsurge in COVID-19 infections and heightening geopolitical risks stemming from Eastern Europe could undercut the country's economic recovery momentum.
The central bank, however, sharply revised upward its inflation outlook for this year, raising the possibility that it could hike the interest rate in its next rate-setting meeting scheduled for mid-April.
As widely expected, the monetary policy board of the central bank voted to freeze the benchmark seven-day repo rate at 1.25 percent.
The decision came after it delivered a quarter percentage-point hike in January at its first rate-setting meeting of the year. January's rate increase marked the third of its kind since August last year, bringing borrowing costs back to pre-pandemic levels.
Separately, the BOK raised its 2022 inflation outlook to 3.1 percent from 2 percent predicted in November amid surging energy costs. This was the first time that the inflation outlook has been raised above 3 percent since April 2012. The bank's growth projection for 2022 remained unchanged at 3 percent.
The BOK said the Korean economy continues to recover despite the resurgence of COVID-19, driven by robust exports, but voiced concerns that global economic growth and financial markets could be affected by the pandemic, inflation woes, monetary policy changes in major countries and geopolitical risks emanating from Eastern Europe.
"The Board will appropriately adjust the degree of monetary policy accommodation as the Korean economy is expected to continue its sound growth, and inflation is predicted to run above the target level for a considerable time, as well as underlying uncertainties over the virus," the BOK said in a statement.
"The Board will judge when to further adjust the degree of accommodation while thoroughly assessing developments related to COVID-19, the risk of a buildup of financial imbalances, the effects of the Base Rate raises, monetary policy changes in major countries, and the trends of growth and inflation."
Bank of Korea / Yonhap
The recent rate increases had been mostly aimed at keeping a lid on growing inflationary pressure and reining in household debt after the rate had been maintained at ultralow levels for about two years to prop up the pandemic-hit economy.
The BOK decided to leave the rate steady this time as it wants to have time to gauge the impact of those three rate hikes amounting to a combined 0.75 percentage points.
Thursday's decision is also attributable to anxiety over the recently spiking coronavirus infections and heightening tensions in Ukraine that could weigh on the country's economy.
Korea's health authorities reported Thursday that daily COVID-19 cases surpassed 170,000 for Wednesday for the second straight day, almost doubling from a week earlier. Infections have been surging in recent weeks due to the fast spread of the more transmissible Omicron variant.
Tensions surrounding Ukraine have also been mounting as Russia ordered the deployment of troops into breakaway regions of eastern Ukraine. The U.S. defined the move as an invasion of the country and announced sanctions on Russia. Fears are growing that a military clash in the region could raise energy and raw material prices for Korea.
Another reason for the BOK to leave the key rate unchanged this month might be intended to wait until it becomes clear how fast and drastically the U.S. will increase its policy rate to counter inflation. The Federal Reserve is widely expected to begin to raise its policy rate in March.
Asia's fourth-largest economy has been on a recovery track thanks to robust exports and a rebound in spending after a slump caused by the pandemic.
The country's gross domestic product is estimated to have grown 4 percent in 2021, a marked turnaround from a year earlier when the economy shrank 0.9 percent, the worst performance since 1998, earlier central bank data showed.
Inflation still remains as a potential drag on the economy ― the fast economic recovery and a rebound in spending along with high energy prices and global supply snarls have added to inflationary pressure.
The country's consumer prices rose 3.6 percent year-on-year in January, staying over the 3 percent mark for the fourth straight month. January's figure was higher than the central bank's midterm target of 2 percent for the 10th straight month.
The BOK has also hinted at more rate hikes going forward.
Following the rate hike decision in January, BOK Gov. Lee Ju-yeol told reporters that the country's monetary policy remains "accommodative" and that he did not see an additional 0.25 percentage point rise as a tightening of this.
Meanwhile, Thursday's rate-setting meeting was the last one presided over by Lee before he leaves office at the end of March. The BOK's next rate-setting meeting is to be held April 14. (Yonhap)