The Bank of Korea Significantly Raises This Year's Growth Rate to 4.0%... Keeps Base Interest Rate at 0.5% (Update)

The Bank of Korea sharply raises this year's growth forecast from 3.0% to 4.0%
Base interest rate held steady at 0.5% per annum... Possibility of increase within the year rises

[Image source=Yonhap News]

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] The Bank of Korea has significantly raised its economic growth forecast for this year to 4.0%. This is a 1.0 percentage point increase from the previous forecast of 3.0%. However, the base interest rate was maintained at a historic low of 0.50% per annum.

On the 27th, the Bank of Korea projected that the Korean economy will grow by 4.0% this year. In February, the Bank had maintained its growth forecast at 3.0%, but it has now made a substantial upward revision. This is attributed to the faster pace of global economic recovery, strong export performance, and the anticipated impact of large-scale fiscal policies going forward.

According to the Korea Customs Service, export value from the beginning of this month to the 20th reached $31.12 billion, a 53.3% increase compared to the same period last year. Not only exports but also private consumption in the first quarter showed signs of recovery. Private consumption increased by 1.1% quarter-on-quarter, driven by durable goods such as passenger cars and home appliances, as well as non-durable goods like food and beverages.

The Bank of Korea had forecasted a 3.0% growth rate on February 25, and reflecting the accelerated growth pace since then, Governor Lee Ju-yeol expressed his intention to revise the forecast upward. Governor Lee stated, "An annual growth rate in the mid-3% range is certainly achievable this year." While the market recently expected a growth forecast in the high 3% range, the Bank's projection is even higher.

If the Bank of Korea's forecast of 4.0% growth is realized, Korea's annual growth rate will be the highest since 2010 (6.8%). In 2010, growth surged rapidly as the country quickly recovered from the global financial crisis.

The Bank of Korea also projected a 3.0% growth rate for next year and forecasted consumer price inflation rates of 1.8% for this year and 1.4% for next year. As the pace of economic recovery accelerates, the inflation forecast was raised by 0.5 percentage points from the previous estimate of 1.3%. The inflation forecast is now approaching the Bank's price stability target of 2.0%.

However, despite raising growth and inflation forecasts, the Monetary Policy Board of the Bank of Korea decided to keep the base interest rate unchanged at 0.50% per annum. Although the domestic economy is showing signs of recovery in exports and investment, factors such as ongoing social distancing measures causing uneven recovery across industries, low vaccination rates, and COVID-19 variants could constrain growth.

With the upward revision of growth and inflation forecasts, the possibility of an interest rate hike within the year has increased. The Bank of Korea has four opportunities to decide on rates this year (July, August, October, November), and currently, the highest likelihood is for a rate hike in November, when herd immunity through vaccination is expected to be achievable. Some speculate that if vaccination progresses faster than expected and the economy overheats, a rate hike could occur as early as the third quarter.

Professor Jinil Kim of Korea University’s Department of Economics suggested that the Bank might preemptively raise the base interest rate ahead of the U.S., depending on circumstances. Professor Kim said, "Governor Lee Ju-yeol’s term ends at the end of March next year, and he may want to raise rates at least once before finishing his term. If a preemptive rate hike occurs, it could happen once at the end of this year or early next year."

Professor Inho Lee of Seoul National University’s Department of Economics stated, "It seems the U.S. will not take long to discuss tapering (asset purchase reduction). The U.S. Federal Reserve (Fed) is also expected to raise rates in the second half of the year, considering the overheating economy." He added, "If the Fed raises rates around the third quarter, Korea will likely follow with a rate hike by the third or fourth quarter at the latest."

Meanwhile, major global financial institutions and domestic and international economic research institutes have already revised upward their economic growth forecasts for Korea. The Korea Institute of Finance projected 4.1%, the Capital Market Institute 4.3%, and LG Economic Research Institute 4.0%, with several institutions forecasting growth above 4%. The U.S. investment bank JP Morgan predicted 4.6%. Earlier, President Moon Jae-in also stated a goal of 4% growth for this year.