South Korea’s central bank said Thursday it will maintain its monetary tightening mode due to still high inflation and financial uncertainties after holding its key interest rate steady for the fourth straight time.
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 fourth straight time that the BOK has stood pat following rate freezes in February, April and May. The rate freezes came after the BOK had delivered seven consecutive rate hikes since April 2022.
The back-to-back rate freezes are cautiously raising expectations that the BOK might be ending its rate hike movement amid signs of moderating inflation and rising economic slowdown woes.
But the central bank said it will keep its policy restrictive until inflation is brought under control.
“The board will maintain a restrictive policy stance for a considerable time with an emphasis on ensuring price stability,” the central bank said in a statement.
After the rate-setting meeting, BOK Gov. Rhee Chang-yong told reporters that six of the board members left the door open for further rate hikes in the future and any potential rate cuts were not on the table.
“We can’t talk about cutting rates. …. We will discuss it when we are assured that inflation is surely on course toward our target level of 2 percent,” Rhee said.
South Korea’s consumer price index slowed for the fifth straight month in June, falling below 3 percent for the first time in 21 months.
Consumer prices, a key gauge of inflation, rose 2.7 percent last month from a year earlier, compared with a 3.3 percent increase tallied in May, marking the first time for the on-year growth in consumer prices to fall below 3 percent since September 2021.
“Although inflation has slowed, it is forecast to pick up again to around the 3 percent level from August and to remain above the target level for a considerable time … Consumer price inflation for the year is expected to be generally consistent with the May forecast of 3.5 percent,” the central bank said.
In May, the central bank lowered its growth outlook for Asia’s fourth-largest economy to 1.4 percent from 1.6 percent predicted three months earlier.
Earlier this month, the finance ministry also cut its own growth outlook for the year to 1.4 percent from 1.6 percent.
“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 central bank said.
Exports, one of the country’s key growth engines, fell for the ninth consecutive month in June due to weak demand for semiconductors.
Outbound shipments fell 6 percent on-year to US$54.24 billion last month, as exports of semiconductors, the country’s key export item, sank 28 percent 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.
However, June saw the smallest on-year export decline so far this year, possibly indicating that the country’s exports may rebound in the second half. The country also reported a trade surplus in June for the first time in 16 months.
South 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 during the first quarter of 2023 from the last quarter of 2022, following a 0.4 percent on-quarter contraction from the third quarter of 2022.
Technically, a recession is two consecutive quarters of negative economic growth.
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 in 2021, marking the slowest pace since 2020, when the economy contracted 0.7 percent amid the fallout from the coronavirus pandemic.
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.
Last month, the Federal Reserve raised its benchmark rate by a widely expected quarter point to the 5 to 5.25 percent range.
The Fed started its aggressive campaign of rate hikes in March last year to tame inflation.
The U.S. central bank is widely expected to deliver another 0.25 percentage point rate hike later this month.
Source: Yonhap News Agency