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June 18, 2024

BOK holds rate at 3.5%, ups growth outlook

PUBLISHED : May 23, 2024 - 17:15

UPDATED : May 23, 2024 - 17:15

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Bank of Korea Gov. Rhee Chang-yong speaks at a press conference held at the policy bank's headquarters in central Seoul, Thursday. (Joint Press Corps-Yonhap)

The Bank of Korea held the base policy rate at 3.5 percent for the 11th consecutive time Thursday, while raising the country’s economic growth rate estimate from the previous 2.1 percent to 2.5 percent.

The central bank’s monetary policy board unanimously agreed to keep the key rate at the current level, BOK Gov. Rhee Chang-yong said at a press conference held shortly after the rate-setting decision.

“The BOK will maintain the base rate amid the strengthening inflationary risks and geopolitical tensions," Rhee said.

“While one of the board members suggested maintaining the possibility of a rate cut happening in three months, other five saw it appropriate to maintain the rate at 3.5 percent after three months,” Rhee said, providing forward guidance on the rate.

Meanwhile, the BOK raised the estimate for the country’s gross domestic product growth rate from the previous 2.1 percent to 2.5 percent.

The estimate revision came as Korea’s GDP rate growth stood at 1.3 percent in the first quarter of this year. It was the first time for the quarterly figure to surpass the 1 percent bar since the 1.4 percent growth recorded in Q4 2021. The growth rate doubled from the 0.6 percent in the previous quarter.

“Exports were larger than expected, while imports were less than expected," he said.

Other economic institutions such as the Organization for Economic Cooperation and Development and the Korea Development Institute also raised the growth rate projection by 0.4 percentage points to 2.6 percent, based on the “surprise growth” in the Q1 GDP.

Yet though the BOK projected a boost in economic recovery, the inflation outlook was maintained at 2.6 percent.

“About three-quarters of the growth rate reconsideration were from net exports,” Rhee said, explaining that export-led growth has a relatively weaker impact on inflation compared to a recovery driven by domestic demand.

“The domestic demand is stronger than our expectations, yet it is yet to say the demand is strong when compared to the overall GDP growth,” he said.

Next year’s growth rate forecast was cut down from 2.3 percent to 2.1 percent, while the inflation estimate was maintained at 2.1 percent.

Rhee continued to maintain a hawkish stance on the monetary policy stance for the latter half of this year despite the market expectations of a rate cut happening in the coming months.

“For future monetary policy decisions, we need more time to have confidence that the inflation will come down to the target rate (at 2 percent),” he said.

Rhee further warned that if the central bank drops its aggressive monetary policy too early, it could lead to a slowdown in disinflation, risk in the currency exchange rates and household debts. But if it drops the policy stance too late, it could result in market risks such as the weakening of domestic demand recovery.

“The uncertainty in the timing of a rate cut has strengthened due to stronger inflationary risks,” Rhee said.

By Im Eun-byel (silverstar@heraldcorp.com)

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