BOK freezes key rate for 4th straight time to sustain growth

The Korea Times

The Korea Times

Finance

Sat, December 9, 2023 | 18:25

Economy

BOK holds key rate steady at 3.5%, warns of household debt

Posted : 2023-07-13 16:05

Updated : 2023-07-14 15:05

Bank of Korea (BOK) Governor Rhee Chang-yong bangs a gavel during a monetary policy board meeting at the BOK headquarters in central Seoul, Thursday. Yonhap

Rate hike to 3.75 percent remains a possibility: BOK governor

By Lee Yeon-woo

The Bank of Korea (BOK) held the key interest rate steady at 3.5 percent for the fourth consecutive time Thursday amid waning inflation and a sluggish growth outlook, hinting that it will maintain a credit-tightening stance in the months to come.

The central bank left open the possibility of a further rate hike to 3.75 percent, citing the U.S. Federal Reserve's rate increase and household debt levels.

Thursday's decision, which follows rate freezes in February, April, and May, is perceived as the BOK's intention to refrain from aggressive hikes amid lingering market concerns, such as weak exports and rising delinquency rates at domestic banks. The consumer price index fell below 3 percent in June for the first time in 21 months, reducing pressure on the central bank.

Speaking to reporters after the rate-setting meeting, BOK Governor Rhee Chang-yong said that every monetary policy board member kept open the possibility of raising the base rate to 3.75 percent.

"The first reason is that we need to monitor the foreign exchange market to decide how to handle interest rates, even though the inflation rate in the United States has dropped to the 3 percent range," Rhee said.

He was referring to the 3 percent year-on-year increase in the U.S. consumer price index in June, which rose at the slowest pace since August 2021.

"Additionally, despite the slowdown in the inflation rate, core inflation remains at a high level. Given uncertainties like how this will change and the movement of household debt, we're keeping the possibility of raising interest rates open," Rhee added.

This is the first time that the BOK governor pointed to household debt as a factor affecting the base rate decision. Household debt has been trending upwards since April, increasing by 5.9 trillion won ($4.6 billion) in June compared to the previous month.

The 1.75 percentage point gap between the U.S. and Korean interest rates also kept steady following the bank's decision. With the Federal Open Market Committee (FOMC) likely to raise its rate by an additional 0.25 percentage point at its upcoming July meeting, there is a high chance that the gap could reach an unprecedented level of 2 percentage points.

In response to concerns about the possible outflow of foreign capital, Rhee maintained his stance that differences in base rates do not always lead to the depreciation of the Korean won.

Bank of Korea (BOK) Governor Rhee Chang-yong speaks to reporters after the monetary policy board meeting at the BOK headquarters in central Seoul, Thursday. Courtesy of BOK

"Discussing a rate cut is not desirable until we are confident that the inflation trajectory aligns with the 2 percent inflation target," Rhee said firmly.

Market watchers view that the latest freeze was primarily influenced by sluggish economic growth, driven by the country's underperformance in exports. The BOK said gross domestic product (GDP) growth for this year is anticipated to align with its May forecast of 1.4 percent.

However, the bank also hinted at a glimmer of hope, observing that the sluggishness of domestic growth has "somewhat eased."

"Going forward, domestic economic growth is expected to recover gradually with private consumption continuing its modest recovery and exports improving due to the easing of the sluggishness in the IT industry," the BOK's monetary policy board said in a statement.

According to separate data released by the BOK on Thursday, import prices fell in June for two consecutive months due to a decline in global oil prices. The BOK suggested that the plunge in import prices would positively contribute to easing inflation over time.

yanu@koreatimes.co.kr