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Bank of Korea Maintains Interest Rates at 3.5% Amid Economic Uncertainty in South Korea

August 24, 2023 at 23:38 PM


Bank of Korea Governor Lee Changyong

[Xinhua Finance]South Korea’s central bank kept interest rates unchanged at 3.5%, the fifth consecutive suspension of interest rate hikes, in line with market expectations. The Bank of Korea said that it will maintain a tightening policy stance for quite a long time, and the uncertainty of South Korea’s economic growth remains high.
The Bank of Korea said that it is expected that domestic economic growth will gradually improve, and the decline in South Korea’s exports will ease, which will help GDP growth; South Korea’s consumption may gradually recover, and the risks faced by some non-bank financial sectors have eased; housing prices in Seoul and surrounding areas Growth will pick up and growth in household debt will be monitored.
The Bank of Korea left its GDP growth forecast unchanged at 1.4% in 2023; it expects GDP growth to be 2.2% in 2024, up from 2.3% in May. The Bank of Korea expects CPI to be 3.5% in 2023, the same as the forecast in May; it is expected to be 2.4% in 2024, the same as the forecast in May. Core inflation is likely to be slightly higher this year than it forecast in May, the Bank of Korea said, raising its 2023 core CPI forecast to 3.4% from 3.3% previously.
The Bank of Korea has been on hold since raising rates in January. The decision of the Bank of Korea to keep interest rates unchanged reflects the cautious attitude of policymakers. The previous year of policy tightening triggered a correction in the real estate market and led to an increase in the project financing delinquency rate of some weakly qualified lenders. Although the authorities have taken steps to stabilize the industry, some weaknesses remain.
According to Yonhap News Agency, as of July 2023, South Korea’s exports have declined for 10 consecutive months. From March 2022 to May 2023, South Korea’s foreign trade deficit will last for 15 months. Analysts pointed out that in 2023, the South Korean economy will fall into a dilemma of continuous decline in exports, sluggish manufacturing, and weak growth. Affected by global high inflation, high interest rates and trade fragmentation trends, South Korea’s export decline is unlikely to be reversed in the short term, and economic recovery is struggling.
Slowing economic growth and high household debt may keep the Bank of Korea from raising interest rates further, opting instead for a hawkish stance to prevent market expectations of rate cuts.
Kwon Hyosung, an economist at Bloomberg News, said, “The Bank of Korea is concerned about the acceleration of bank lending to households, which is a financial stability risk, and inflation will come back later this year.” Putting significant downward pressure on that is another reason. With the fragile non-bank sector at risk of loan defaults, rate hikes are unlikely.”
The Bank of Korea rate decision was made ahead of global monetary officials gathering for their annual meeting in Jackson Hole, United States.
Bank of Korea Governor Rhee Changyong said in parliament on Tuesday that the council will pay attention to Fed Chairman Jerome Powell’s speech on Friday, saying that the direction of U.S. monetary policy is more important than the interest rate differential between South Korea and the United States.

2023-08-24 15:38:00
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