Source: Bonhap
South Korea’s central bank froze the key interest rate for the sixth time in a row amid slowing growth and continuing uncertainties, such as the long war between Ukraine and Russia and high household debt.
In a widely expected decision, the Bank of Korea’s Monetary Policy Council left the benchmark seven-day repurchase rate unchanged at 3.5%.
This is the sixth time in a row that the bank has taken this decision after freezing interest rates in February, April, May, July and August, after the bank raised interest rates seven times in a row from April 2022 to January 2023.
The Korean economy faces the possibility of a slowdown in the face of rising economic risks in China, the country’s largest trading partner, and an extended decline in overseas shipments amid easing inflationary pressures. This is in addition to the long war between Russia and Ukraine and high household debt. The recent war between Israel and Hamas has also emerged as a new risk factor for the economy, as oil prices could remain high for a longer period.
In May, the bank lowered its economic growth forecast to 1.4% from 1.6% growth forecast three months earlier.
The South Korean economy grew slightly faster at a rate of 0.6% in the second quarter of this year compared to the first quarter, despite a decline in exports. In the first quarter, the economy recorded growth of 0.3% after a contraction of 0.3%.
Last year, the country’s economy grew by 2.6%, slowing from 4.1% progress in 2021 and representing the slowest pace since 2020, when the economy contracted by 0.7% amid the repercussions of the Corona pandemic.
In a related context, South Korea’s exports decreased for the twelfth consecutive month in September, but recorded the smallest decline on an annual basis so far this year, as global demand for semiconductors recovers.
Exports have witnessed a steady decline since October last year amid strong monetary tightening by major economies to curb rising inflation. It is also the first time since 2020 that exports have declined for nine months in a row.
Exports this year are expected to grow by 0.7%, slowing from 2.6% growth last year. Private spending is also expected to grow by 2%, which also represents a slowdown from the 4.1% rise last year, according to the central bank.
As a positive sign for the central bank, inflation has begun to moderate, although its pace accelerated last month due to higher oil prices.
Consumer prices rose 3.7% last month from a year earlier, the fastest pace in five months, driven by higher oil costs and higher prices for some agricultural commodities.
The Bank of Korea expects inflationary pressures to build in the future, with inflation expected to remain above 3% by the end of the year, well above the target rate of 2%. The bank also expects inflation to reach 3.5% for the whole year.
The interest rate freeze also came at a time when rising household debt is another troubling concern for policymakers. House prices have rebounded in Seoul and other regions, on the back of easing restrictions on loans.
Household loans from banks in South Korea rose for the sixth month in a row, led by a rise in mortgage lending.
The central bank’s interest rate freeze also came in the face of the widening spread with the interest rate in the United States. It is feared that higher interest rates in the United States will lead to an outflow of funds from South Korea, thus weakening the local currency against the dollar and exerting upward inflationary pressure by making imports more expensive.
In September the Federal Reserve froze its key lending rate at a range of 5.25% to 5.5%, the highest level since 2001, putting the gap between South Korea and the United States’ key interest rates at an all-time high of 1.75-2.0. percentage point.
The Federal Reserve began its aggressive campaign to raise interest rates in March last year in order to curb inflation.