BOK again stands pat on rates, trims growth estimate amid slowdown woes
Containers for export are stacked at a pier in Korea's largest port city of Busan, 320 kilometers south of Seoul, May 10. Yonhap
Korea's central bank held its key interest rate steady for the third straight time Thursday as it trimmed this year's growth estimate in the face of an extended slowdown in exports amid moderating inflation.
In a widely expected decision, the monetary policy board of the Bank of Korea (BOK) kept the benchmark seven-day repo rate unchanged at 3.5 percent.
This marked the third straight time that the BOK has stood pat following a rate freeze in February and another in April. The rate freezes came after the BOK had delivered seven consecutive hikes in borrowing costs since April last year.
The central bank said inflation will remain above the target level for a considerable time and therefore sees a need to maintain its restrictive policy stance, according to the bank's statement.
"The board will continue to conduct monetary policy in order to stabilize consumer price inflation at the target level over the medium-term horizon as it monitors economic growth, while paying attention to financial stability," the central bank said in a statement released after the rate freeze.
The back-to-back rate freezes are raising expectations that the BOK might be ending its aggressive rate hike amid signs of moderating inflation, rising economic slowdown woes.
The central bank also lowered its growth outlook for Asia's fourth-largest economy to 1.4 percent from a 1.6 percent expansion predicted three months earlier. The BOK maintained its inflation forecast for the year at 3.5 percent.
Korea's consumer prices grew at the slowest pace in more than a year in April in the latest signal that inflation has receded.
Consumer prices, a key gauge of inflation, rose 3.7 percent last month from a year earlier, compared with a 4.2 percent on-year rise in March, marking the first time in 14 months that the on-year inflation growth fell below 4 percent.
Though inflation appears to be moderating, the country's economy is showing signs of slowing down too, with exports, the country's major growth engine, sharply shrinking in the face of less demand in major markets.
The country's outbound shipments fell for the seventh consecutive month in April due mainly to sagging global demand for semiconductors amid an economic slowdown.
The decline in exports last month came as exports of semiconductors, the country's key export item, sank 41 percent on-year on falling demand and a drop in chip prices.
Exports have logged an on-year fall since October last year amid aggressive monetary tightening by major economies to curb inflation and an economic slowdown. It is also the first time since 2020 that exports have declined for seven months in a row.
Thursday's freeze also comes even though the rate difference with the United States is widening. Higher rates in the U.S. are feared to prompt money outflows from here, thereby weakening the local currency against the dollar and exerting upward inflation pressure by making imports more expensive.
Earlier this month, the Federal Reserve raised its benchmark rate by a widely expected quarter point to a 5 percent to 5.25 percent range, possibly the last in its policy firming.
The Fed started its aggressive campaign of rate hikes in March last year to tame inflation.
In this photo provided by the Bank of Korea, the central bank's monetary board holds a rate-setting meeting at its headquarters in Seoul on May 25. Yonhap
Korea's economy narrowly avoided a recession in the first quarter of the year after a contraction the previous quarter.
The economy grew 0.3 percent in the January-March period from the previous quarter, following a 0.4 percent on-quarter contraction the previous quarter.
Technically, two consecutive quarters of economic contraction are judged to be a recession.
On a yearly basis, Asia's fourth-largest economy expanded 0.8 percent in the first quarter, compared with the fourth quarter's 1.3 percent on-year gain.
Last year, the country's economy grew 2.6 percent, slowing from a 4.1 percent advance the previous year amid aggressive monetary tightening at home and abroad.
The 2022 growth marked the slowest pace since 2020, when the economy contracted 0.7 percent amid the fallout from the coronavirus pandemic.
The Organization for Economic Cooperation and Development projects Korea's growth outlook for 2023 to be 1.6 percent, and Moody's Analytics forecast 1.4 percent growth.
For the year, the BOK expects a 1.6 percent expansion, and the International Monetary Fund sees a 1.5 percent advance. (Yonhap)