Seoul - The Bank of Korea (BOK) decided on Thursday to maintain its key interest rate at 3.5 percent for the seventh consecutive time, amidst ongoing global economic challenges and heightened geopolitical risks. This move follows a series of rate freezes that began in February and includes decisions made in April, May, July, August, and October. These decisions succeeded a period of seven consecutive rate hikes from April 2022 to January 2023.
According to Yonhap News Agency, the central bank has maintained its growth estimate for this year at 1.4 percent but reduced its projection for 2024 from 2.2 percent to 2.1 percent. The inflation forecast for the next year has also been raised to 2.6 percent from the earlier estimate of 2.4 percent. The BOK cited the sustained restrictive monetary policies in major economies and high inflation rates as key factors influencing these adjustments.
South Korea's economy, the fourth-largest in Asia, has been grappling with declining exports and weak consumer spending. The uncertain global economic outlook, coupled with China's economic slowdown and a delay in the IT sector's recovery, has adversely impacted South Korea's exports. However, recent data indicates a rebound in exports, driven by strong auto shipments and improvements in the chip sector, with a 5.1 percent year-on-year increase to $55 billion in October, leading to a trade surplus of $1.64 billion.
The country's GDP growth rates for the first three quarters of this year were reported at 0.3 percent, 0.3 percent, and 0.6 percent, respectively. In contrast, the economy expanded by 2.6 percent last year, a slowdown from the 4.1 percent growth in 2021, and marked the slowest pace since 2020 when the economy contracted by 0.7 percent due to the coronavirus pandemic.
Inflation, which grew 3.8 percent in October, remains a concern, staying above 3 percent for the third consecutive month. This increase is primarily attributed to higher energy and farm goods prices. However, stabilizing oil prices, particularly in the wake of the Israel-Hamas conflict, are expected to contribute to a downward inflation trend.
The BOK also noted the rising household debts in South Korea, which could further weaken domestic demand. Banks’ outstanding household loans reached a record high of 1,086.6 trillion won ($833.6 billion) at the end of October.
In addition, the BOK's decision comes amid a widening interest rate gap with the United States, raising concerns over potential money outflows from South Korea, which could weaken the local currency and increase inflation by making imports more expensive. The U.S. Federal Reserve has maintained its lending rate at a 22-year high, with rates between 5.25 and 5.50 percent, as part of its efforts to control inflation.
The Fed is expected to maintain its current rate in the upcoming month, continuing its aggressive campaign that began in March last year.