BOK opens door for policy pivot after extending rate pause
Bank of Korea Gov. Rhee Chang-yong speaks during a press conference after the bank's monetary policy board decided to keep the benchmark rate at 3.5 percent for the eighth consecutive session at the bank's headquarters in Seoul, Jan. 11. Yonhap
Korea's central bank froze its key rate for the eighth straight session Thursday amid woes over a still weak economic recovery and slower-than-expected inflation moderation but signaled that it may shift toward ending its restrictive stance.
In a widely expected decision, the monetary policy board of the Bank of Korea (BOK) kept its policy rate unchanged at 3.5 percent.
This marked the eighth straight time that the BOK has stood pat following rate freezes in February, April, May, July, August, October and November, 2023. The rate freezes came after the BOK delivered seven consecutive rate hikes from April, 2022 to January, 2023.
The central bank said it will maintain a restrictive policy stance for a sufficiently long period of time until it is assured that inflation will converge on the target level.
"Although inflation has continued its underlying trend of a slowdown, it still remains high, and uncertainties regarding the outlook are also judged to be high," the central bank said in a statement.
But the bank deleted the long-held sentence in the statement that it will "judge the need to raise the base rate further," possibly hinting at easing its tightening mode in tandem with its global peers in the future.
BOK Gov. Rhee Chang-yong, however, said it is too early to discuss possible rate cuts, and it is unlikely for the bank to cut any rate for at least six months.
"We judge that the need for an additional rate hike is lower than earlier due to the underlying trend of moderating inflation and eased woes over oil prices and geopolitical risks," Rhee told reporters. "The current rate level may last for a longer period."
The BOK chief also said any hasty rate cut could boost inflation expectations and jack up property prices.
The rate freeze took place as Korea's economy has shown signs of a recovery in exports while consumer spending still remains sluggish amid easing inflationary pressure.
Last year, the economy is expected to grow 1.4 percent, meeting the central bank's estimate. But its expansion slowed from the previous year's 2.6 percent gain and a 4.1 percent advance in 2021.
For the year, the economic growth is forecast to rebound to over 2 percent, but Asia's fourth-largest economy is facing headwinds, such as a slump in the property market and weak domestic demand.
Korea's exports decreased 7.4 percent on-year in 2023 amid the sluggish performance of chips coupled with global economic uncertainties, but in December, monthly exports advanced 5.1 percent on-year rising for the third consecutive month.
As to domestic economic conditions, the central bank projected a modest recovery, supported by exports. The future path of economic growth is likely to be affected by the effects of restrictive monetary policy stances in major economies and by the degree of improvement in the IT industry, it added.
Policymakers are also pinning hopes on easing inflation, although the pace of a slowdown is expected to be slower than expected.
The country continued to experience high inflationary pressure last year following the sharpest inflation in decades in 2022, but inflation in December, 2023 ticked down for the second consecutive month in a sign that price pressure is easing.
Consumer prices, a key gauge of inflation, rose 3.6 percent on-year in 2023, slowing from a 5.1 percent gain in 2022, but it is still far higher than the central bank's 2 percent target.
In December, 2023, consumer prices rose 3.2 percent on-year, the fifth consecutive month that the prices have stayed above the 3 percent level, though the growth has slowed down for two months in a row.
The central bank is also paying keen attention to rising household debts, which could further weaken domestic demand.
Household loans extended by banks in Korea rose for the ninth straight month in December, 2023, led by rising home-backed loans.
The BOK's rate freeze also came in the face of rising woes over project financing developments, which could wreak havoc on financial institutions, and further sap domestic demand.
Recently, Taeyoung Engineering & Construction, a midsized builder struggling with heavy debts, is in talks with its creditors for a debt workout.
The central bank's rate freeze followed the Federal Reserve's decision last month to hold its benchmark lending rate steady for the third consecutive time.
The Fed kept the rate between 5.25 and 5.50 percent and hinted that its hiking campaign — launched in March, 2022 — may be near or at an end.
But Fed Chairman Jerome Powell has stressed that the Fed is prepared to tighten the rate further if appropriate. (Yonhap)