[Asia Economy Reporter Seo So-jeong] The Monetary Policy Committee of the Bank of Korea raised the base interest rate by 0.25 percentage points to an annual rate of 3.25% on the 24th. The committee had previously raised the base rate in April, May, July, August, and October meetings, and with this final meeting of the year, it set a record for the first-ever six consecutive rate hikes. The rate hike was continued to narrow the interest rate gap with the United States, which had widened up to 1 percentage point due to the persistently high consumer inflation rate above 5% and the U.S. Federal Reserve’s unprecedented four consecutive giant steps (0.75 percentage point hikes in the base rate).
Additionally, the Bank of Korea significantly lowered its economic growth forecast for next year from 2.1% announced in August to 1.7%, and also revised down the inflation forecast for next year from 3.7% to 3.6%.
At the Monetary Policy Committee meeting held from 9 a.m. that day, the Bank of Korea raised the base interest rate from the current annual 3.00% to 3.25%. This year, the base rate was raised by 0.25 percentage points each in January, April, and May; by 0.50 percentage points in July; by 0.25 percentage points in August; by 0.50 percentage points in October; and with this additional 0.25 percentage point hike, it returned to 3.25% for the first time in 10 years and 4 months since July 2012.
The Bank of Korea’s decision to slow the pace with a baby step (0.25 percentage point hike) this time was due to growing expectations that the intensity of U.S. monetary tightening would weaken amid the recent global economic slowdown, as well as the domestic capital market instability, including the bond market, which has not been easily resolved following the Legoland incident.
Although the burden of high inflation above 5% remains, the recent stabilization of the won-dollar exchange rate and the decline in international oil prices have spread the perception that inflation has peaked. The expected inflation rate, which corresponds to the anticipated inflation over the next year, also slightly dropped to 4.2% this month from 4.3% last month, indicating that the monetary policy decision placed more weight on economic sluggishness and financial stability.
In the revised economic outlook released that day, the Bank of Korea sharply lowered the growth forecast for next year to 1.7%, which is 0.4 percentage points lower than the previous August forecast of 2.1%. This is the first time in 12 years and 11 months, excluding the COVID-19 period, that the Bank of Korea has forecast economic growth below 2%, since December 2009 (0.2%). The consumer price inflation forecast for next year was also revised down by 0.1 percentage points from 3.7% to 3.6%.
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