(3rd LD) BOK holds rate at 3 pct after 2 straight hikes, signals continued tightening

(ATTN: UPDATES with governor's comments in paras 9, 18-24; RECASTS headline, lead; ADDS new photo)
By Kim Boram

SEOUL, Oct. 22 (Yonhap) -- The Bank of Korea (BOK) kept its benchmark interest rate unchanged Thursday after two consecutive rate hikes to give the central bank time to assess economic conditions amid prolonged tensions in the Middle East and robust exports.

In a widely anticipated decision, the BOK's Monetary Policy Board held the key rate steady at 3 percent in its rate-setting meeting.

The rate freeze came after the BOK raised the benchmark rate in its July and August meetings, citing "preemptive action" to curb mounting inflationary pressure and ensure macroeconomic stability.

The earlier decisions marked the first back-to-back rate hikes since January 2023, when the central bank raised the rate at seven consecutive meetings starting in April 2022.

The central bank paused its tightening cycle amid concerns that higher borrowing costs could place greater financial burden on lower-income households.

"Given the growing uncertainties surrounding the Middle East conflict and monetary and fiscal policies in major economies, the board judged that it would be necessary to assess developments in both domestic and external risk factors and the effects of the two prior rate hikes while maintaining the current level of the base rate," the board said in a statement.

It said all seven board members supported the rate freeze.

However, the BOK has signaled it will maintain a hawkish stance for the time being amid inflationary pressures from rising oil prices and renewed uncertainty in the Middle East, as well as a stronger-than-expected economic recovery.

"The back-to-back rate hikes give the BOK room to maneuver," Gov. Shin Hyun-song said during a press conference. "However, it is necessary to continue monetary tightening."

Consumer prices have hovered around the 3 percent level in recent months, rising 2.8 percent in July, 3.1 percent in August and 2.9 percent in September.

Inflation is expected to remain at a similar level in October amid rising oil prices linked to escalating military tensions in the Middle East.

Shin has said the central bank will continue tightening monetary policy until inflation is firmly on track to reach its 2 percent target.

Solid economic growth has also supported the BOK's hawkish stance, with Asia's fourth-largest economy expanding 1.8 percent in the first quarter and 0.6 percent in the second quarter.

The country's current account surplus reached US$279.2 billion in the first eight months of the year, more than quadrupling from the same period last year.

The BOK raised its 2026 growth forecast to 3.3 percent from 2.6 percent in August, suggesting the economy could expand by as much as 3.6 percent, supported by robust semiconductor exports amid strong demand for artificial intelligence (AI) infrastructure.

"Going forward, exports and investment are expected to sustain their high growth, driven by a strong semiconductor sector, while the recovery in consumption is likely to gradually accelerate, supported by improving income conditions," the central bank said.

"The growth rates for this year and next year are expected to be considerably higher than the August forecasts of 3.3 percent and 2.9 percent, respectively."

Shin said the strengthening won had also helped boost consumption in recent months, noting that the currency had appreciated to around 1,320 won per U.S. dollar from around 1,560 won in June.

"When the won strengthens by 10 percent, consumption power of the highest income group rises by 0.4 percent," he said. "But the Korean currency is still undervalued in terms of effective exchange rate."

The effective exchange rate, compiled by the Bank for International Settlements (BIS), measures a currency's value against those of major trading partners and serves as a gauge of international price competitiveness.

Shin also noted that a recent correction in the stock market had weighed on consumption to some extent, but described it as a passing phase.

On the appropriate coordination of monetary and fiscal policies, Shin said investment-focused fiscal spending was compatible with monetary tightening.

"Fiscal spending could increase inflationary pressure through boosting gross demand in the short term, but it could push up growth rate in the longer term," he said. "However, fiscal spending needs to be designed carefully to ensure temporary measures do not become permanent."

Shin also said the central bank expects inflation to approach its 2 percent target in 2028.

The BOK said it will decide the timing and pace of further rate hikes, while assessing trends in inflation and the domestic economy, and financial stability.

Market experts expect the BOK to deliver another rate hike at its next policy meeting, scheduled for Nov. 26.

brk@yna.co.kr
(END)