Bank of Korea Freezes Base Rate at 3.0%

Shin Hyun-song, Governor of the Bank of Korea, gavels in the Monetary Policy Board meeting held at the Bank of Korea headquarters in Jung-gu, Seoul, on Oct. 22. (Yonhap) The Bank of Korea’s Monetary Policy Board froze the base rate at an annual 3.0% on Oct. 22. The central bank opted to take a pause to examine the ripple effects of the consecutive base rate hikes in July and August. However, considering the record current account surplus, high economic growth rate, and demand-side upward pressure on inflation caused by increased income and tax revenue, it is highly likely that the Bank of Korea will raise the interest rate next month. The Monetary Policy Board’s decision to maintain the base rate at the current level appears to stem from the need to evaluate the effects of the preemptive rate hikes in July and August. During the Monetary Policy Board meeting in August, Bank of Korea Governor Shin Hyun-song emphasized that it was a ‘preemptive hike,’ quoting the proverb, ‘blocking with a spade what could have been blocked with a hoe.’ At the parliamentary inspection by the National Assembly’s Finance and Economy Planning Committee on Oct. 12, Governor Shin explained the effects of the consecutive hikes, stating, “I think we bought some time,” and “We set the monetary policy stance toward raising interest rates a little earlier than other major countries.” Although the base rate was tied to the current level, this decision is interpreted as a ‘hawkish freeze.’ Considering inflation, growth, and housing prices, the Bank of Korea is expected to maintain its rate-hiking stance for the time being. The consumer price inflation rate recorded in the 3% range at 3.1% in May and 3.2% in June this year, followed by 2.8% in July, 3.1% in August, and 2.9% in September. The Bank of Korea judges that the upward trend in prices expanded even in September, considering the base effect of suppressed inflation due to SK Telecom’s telecommunication fee reduction in August last year. The consumer price inflation rate in October is also expected to continue at a high level of around 3%. The high economic growth rate is a factor that eases the Bank of Korea’s burden of raising interest rates. In its economic outlook in August, the Bank of Korea significantly raised this year’s annual growth rate forecast from 2.6% to 3.3%, while suggesting a maximum of 3.6% or higher under an optimistic scenario. As economic fundamentals provide support, concerns about the side effects of an economic slowdown caused by rate hikes can be alleviated. Furthermore, demand-side upward pressure on inflation resulting from robust semiconductor exports remains persistent. The massive foreign currency earned through exports leads to an increase in income and tax revenue, which could push up prices. The cumulative current account from January to August this year recorded a surplus of $279.2 billion, exceeding four times the amount from the same period last year. Concerns over financial stability are another factor supporting a base rate hike. Despite the government’s successive real estate measures, the recent upward trend in housing prices in the Seoul metropolitan area remains unbroken. Although the government is suppressing new household loans, household loans at major commercial banks have been on an increasing trend this month. The outstanding household loan balance of the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) stood at 783.5983 trillion won (about $591.75 billion) as of Oct. 15, an increase of 2 trillion 764.3 billion won from the end of September. At the very least, the recently stabilized exchange rate is reducing the need for an immediate rate hike. The won-dollar exchange rate dropped to 1,322.8 won during intraday trading the previous day due to dollar selling by exporting companies. Based on the intraday low, it was the lowest level in two years since Oct. 2, 2024 (1,317.1 won). Taking this situation into account, the market forecasts that there is a high possibility the Monetary Policy Board will raise the base rate again at its meeting on Nov. 26.