BOK likely to freeze key rate again amid colliding risks
Bank of Korea (BOK) Governor Rhee Chang-yong, right, speaks during a meeting with the Korean press, Thursday (local time), in Morocco, where he is attending the 2023 Annual Meetings of the World Bank Group and International Monetary Fund. Yonhap
The Bank of Korea (BOK) is anticipated to leave the policy rate unchanged again in its upcoming rate-setting meeting scheduled for next Thursday, to counter colliding financial risks increasingly complicating the country’s path to economic recovery.
However, it is highly probable that the central bank will send a hawkish signal that the rate hike cycle has not come to an end, in order to dismiss concerns over a further capital outflow caused by the widening interest rate gap between Korea and the U.S.
A possible rate pause at 3.5 percent will occur for the sixth time in a row since January, which may consolidate market belief that the BOK’s rate hike cycle is over, even if it keeps the door open for additional hikes.
However, such a pause should not be taken for granted, according to analysts, Friday.
“The multiple, chronic risks from here and abroad are becoming trickier to keep under control at the same time,” said Lee Sang-ho, head of the economic policy team at the Korea Economic Research Institute (KERI).
Under the circumstances, Lee warned that “striking a balance in tackling the risks of conflict is especially crucial as failing to do so will have unwanted side effects anyway.”
Among the risks Lee addressed were surging home loans and weakened private spending.
The outstanding balance of bank loans taken out by prospective homeowners increased by 5.7 trillion won ($4.2 billion) in September, although the current 3.5 percent benchmark borrowing rate is at a 14-year high.
Resuming a rate hike to curb the loan increase, however, can sacrifice weakened private spending ― one of the twin engines of the Korean economy along with exports.
Private consumption slid by 0.1 percent in the second quarter, failing to sustain growth after a 0.5 percent increase in the previous quarter.
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“You can see how, if realized, a rate pause will be determined in demanding circumstances,” Lee said.
Another colliding factor addressed against weakened private spending was volatility in energy and commodity prices worldwide.
Such volatility puts upward inflationary pressure on consumer prices. After coming down to a 25-month low of 2.3 percent in July, consumer inflation grew for the second month in a row, hitting 3.4 percent in August and 3.7 percent in September.
“But even so, ending the rate pause to tackle inflation will not necessarily help revitalize spending as many households will need to make more repayments instead,” said Jung Yoo-tag, a research fellow at Hana Institute of Finance.
Speaking on condition of anonymity, an LG Economic Research economist also sided with a possible skip of rate hikes, under the condition that “such a decision will be coordinated more carefully than ever.”
He said if Korea keeps the rate steady, it will continue to run the risk of a record interest rate gap with the U.S. after the U.S. Federal Reserve’s hawkish rate pause in September.
The U.S. rate is in the range of 5.25 percent to 5.5 percent. It marks a 22-year high, persistently raising concerns over the massive outflow of foreign capital from Korea in search of safer haven assets.
It could be increased further in the U.S central bank’s two remaining rate-setting meetings this year ― scheduled for late October and December ― considering the Fed Chair Jerome Powell said the U.S. central bank still has “a long way to go” in bringing down inflation to its target of 2 percent.
Meanwhile, the experts assessed the resurgence in consumer inflation in August and September as “under the BOK’s anticipated trajectory” and said it will not influence the rate decision.