South Korea’s central bank, the Bank of Korea (BOK), has decided to freeze its key interest rate for the fourth consecutive time, as the country faces an uncertain growth outlook and easing inflation. The benchmark seven-day repo rate will remain unchanged at 3.5 percent.
This marks the continuation of a trend, as the BOK has maintained the same rate since February, following seven consecutive rate hikes since April 2022. The decision to keep rates on hold is seen as a response to signs of moderating inflation and concerns over a slowdown in the economy.
The country’s growth outlook has been revised downwards, with both the BOK and the finance ministry cutting their growth forecasts to 1.4 percent for the year. One of South Korea’s key growth engines, exports, has also been declining for the past nine months due to weak demand for semiconductors.
However, June saw the smallest decline in exports this year, suggesting the possibility of a rebound in the second half. The country also reported a trade surplus in June for the first time in 16 months.
The South Korean economy narrowly avoided a recession in the first quarter of the year after a contraction in the previous quarter. However, the economy grew by only 0.3 percent in the first quarter of 2023 compared to the last quarter of 2022. On a yearly basis, the economy expanded by 0.8 percent in the first quarter, slower than the fourth quarter’s 1.3 percent gain.
Inflation in South Korea is moderating, providing some relief to the central bank. The consumer price index rose 2.7 percent in June from a year earlier, falling below 3 percent for the first time in 21 months.
Despite the freeze in rates, there are concerns about the widening rate difference with the United States. Higher rates in the US could lead to capital outflows from South Korea, weakening the local currency and increasing inflationary pressures through more expensive imports. The Federal Reserve is expected to raise its benchmark rate by 0.25 percentage points later this month.
Overall, the BOK’s decision to hold rates steady reflects the cautious approach towards the country’s economic challenges, including sluggish growth and easing inflation. The central bank will continue to monitor the situation closely and adjust its policies accordingly.
