BOK extends rate freeze amid inflation woes, raises 2024 growth estimate

Korea’s central bank froze its key rate for the 11th straight session Thursday, given still-high inflation and a faster-than-expected growth projection for the year.

In a widely expected decision, the monetary policy board of the Bank of Korea (BOK) kept its policy rate unchanged at 3.5 percent.

The BOK has continued to stand pat following rate freezes since February last year after delivering seven consecutive rate hikes from April 2022 to January 2023.

The rate freeze took place as inflationary pressure in Asia’s fourth-largest economy still remains high, while the country’s economy is expected to grow faster than expected this year on the back of robust exports.

“While it is forecast that inflation will maintain its slowing trend amid domestic economic growth having improved more than expected, it is premature to be confident that inflation will converge on the target level, as upside risks to inflation forecasts have increased,” the central bank said in a statement.

BOK Gov. Rhee Chang-yong said uncertainties over potential rate cuts have increased amid the outlook of rising inflation.

“There are expectations about a rate cut during the second half, but upward inflationary pressure is also rising,” Rhee told reporters after the monetary policy meeting.

The governor said only one BOK board member still sees a rate cut within three months, the same number as during the previous decision.

Rhee said the central bank may consider any potential rate cut if inflation cools down to around 2.3 percent to 2.4 percent.

“There are more uncertainties over the timing of a rate cut during the second half compared with April,” Rhee said.

The country continued to experience high inflationary pressure last year following the sharpest inflation in decades in 2022.

Korea’s inflation rose 2.9 percent in April, marking the first time in three months that the index fell below 3 percent. But the reading is still higher than the central bank’s midterm inflation target of 2 percent.

In January, inflation fell below 3 percent for the first time since July 2023, but high prices of fruits, farm produce and energy have caused inflationary pressure to flare up again.

Recently, global oil prices have been high, and inflation in the United States has remained high as well, prodding the central bank to remain cautious in cutting rates.

The rate freeze also came as the central bank heightened its growth projection for the year.

The central bank jacked up its growth estimate to 2.5 percent for the year, up from its earlier projection of 2.1 percent, but slashed the 2025 growth outlook to 2.1 percent from 2.3 percent. The bank kept its inflation outlook at 2.6 percent for the year.

“The domestic economic growth rate substantially exceeded expectations in the first quarter this year owing to the continued buoyancy of exports and the easing of sluggishness in consumption and construction investment … Going forward, it is forecast that consumption will continue its modest recovery in the second half of the year after a slowdown in the second quarter, amid an ongoing increase in exports,” the central bank said.

A person buys bread in Dongdaemun district, Seoul, May 21. Yonhap

Korea’s economy grew at a higher-than-expected rate of 1.3 percent in the first quarter of the year, aided by a continued recovery in exports and a rise in construction investment.

The first-quarter expansion beat the market estimate of 0.6 percent and the 0.6 percent on-quarter expansion in the September-December period.

The reading marks the highest since the fourth quarter of 2021, when the economy expanded 1.4 percent.

On a yearly basis, Korea’s economy advanced 3.4 percent in the first quarter, higher than the 2.2 percent growth for the last quarter of 2023.

Last year, the economy expanded 1.4 percent, slowing from the previous year’s 2.6 percent gain and the 4.1 percent advance in 2021.

The central bank said private spending for the year is expected to grow 1.8 percent, higher than the earlier estimate of 1.6 percent, and facility investment is likely to increase 3.5 percent this year, compared with an earlier projection of 4.2 percent.

The country’s construction investment is expected to contract 2 percent this year, compared with its earlier estimate of a 2.6 percent fall.

Exports, meanwhile, are expected to rise 5.1 percent this year, faster than the February estimate of 4.5 percent.

The current account surplus is forecast to reach $60 billion this year, also higher than its earlier estimate of $52 billion.

The central bank is also paying keen attention to high household debts, which could further weaken feeble domestic demand.

Household loans extended by banks in Korea rebounded in April, led by a rise in mortgage loan growth.

Banks’ outstanding household loans increased 5.1 trillion won last month from a month earlier, a rebound from a 1.7 trillion-won fall the previous month.

The central bank’s rate freeze followed the Federal Reserve’s decision earlier this month to hold its benchmark lending rate steady at between 5.25 percent and 5.50 percent for the sixth consecutive time. (Yonhap)