Bank of Korea Holds Monetary Policy Direction Meeting
Decides to Keep Rates Steady for Two Consecutive Times
On the 11th, the Bank of Korea (BOK) decided to keep the base interest rate steady at 3.5% per annum during the Monetary Policy Committee meeting. The committee halted the rate hike streak that had lasted for one and a half years since February and decided to maintain the rate for two consecutive times this month, strengthening the market view that the BOK's rate hike cycle has effectively come to an end.
At the monetary policy direction meeting held that day, the BOK's Monetary Policy Committee decided to keep the base rate at 3.50% per annum. Previously, the committee had raised the base rate by 3.00 percentage points over 18 months since August 2021. In February this year, amid ongoing economic uncertainties, the committee paused rate hikes to 'catch its breath,' and by deciding to hold rates steady again this month, it reinforced the market's perception that the tightening cycle is nearing its conclusion. With the BOK maintaining the base rate, the interest rate gap with the United States (4.75~5.00%) remains at 1.5 percentage points.
The main reason for the BOK's decision to hold rates this month is the recent slowdown in the consumer price inflation rate, which has gradually eased inflationary pressures. The consumer price inflation rate in March dropped to 4.2%, the lowest in a year and in the low 4% range, showing signs of easing inflation and weakening the need for further tightening. Park Seok-gil, an economist at JP Morgan, said, "Inflation is expected to stabilize gradually in the second half of the year," adding, "Given the increased uncertainty in international financial markets, it appears the BOK held rates to wait for the stabilizing effects of previous hikes."
In particular, the visible slowdown in the domestic economy, including exports and domestic demand, also contributed to the decision to hold rates. Due to continued export sluggishness, South Korea's real gross domestic product (GDP) growth rate recorded a negative -0.4% in the fourth quarter of last year, and it remains uncertain whether the economy escaped contraction in the first quarter of this year. The current account deficit reached a record high of $4.52 billion in January, and deficits continued in February, prolonging the economic weakness.
Additionally, the recent risks related to global banks such as Silicon Valley Bank (SVB) and Credit Suisse (CS) have eased expectations for further rate hikes by the U.S. Federal Reserve (Fed), which also influenced the BOK's decision to hold rates. Kang Seung-won, a researcher at NH Investment & Securities, said, "The option for accelerated Fed tightening, which was a key reason for additional hikes, has effectively disappeared," and added, "With inflation running below the BOK's forecast and a focus shifting to the economy, the BOK's rate hike cycle has already ended."
Governor Lee Chang-yong: "This Year's Growth Rate Slightly Below February Forecast of 1.6%"
Governor Lee Chang-yong of the BOK predicted, "This year's growth rate will slightly underperform the February forecast of 1.6%, and the consumer price inflation rate will fall to the 3% range after the second quarter, aligning with the annual forecast of 3.5% made in February." He emphasized, "We will monitor growth trends and operate monetary policy with attention to financial stability, ensuring inflation stabilizes at the target level over the medium term."
With the committee's decision to hold rates this month, the market has largely accepted the end of the rate hike cycle as a given. Joo Won, head of economic research at Hyundai Research Institute, said, "Due to easing inflation and recession concerns, the rate hike cycle has effectively ended," and predicted, "The BOK may start cutting rates in the second half of this year ahead of the U.S. Fed." On the other hand, Cho Young-moo, a research fellow at LG Economic Research Institute, stated, "The U.S. economy is expected to enter a recession by mid-year, and the Fed's rate hikes will end in the first half," adding, "Given the historically wide interest rate gap between Korea and the U.S., it will be difficult for Korea to shift to rate cuts before the U.S. The BOK is unlikely to lower the base rate until the end of the year."
However, the possibility of further rate hikes has not been completely ruled out. With the BOK holding rates steady, the interest rate gap between Korea and the U.S. remains at 1.50 percentage points. If the Fed raises its base rate by 0.25 percentage points at the May Federal Open Market Committee (FOMC) meeting, the gap with the U.S. (5.00~5.25%) could widen to 1.75 percentage points at the upper bound. This would surpass the previous record maximum gap of 1.5 percentage points recorded from May to October 2000, potentially becoming a burden. A wider gap with the U.S. could increase pressure on foreign investors to withdraw funds from the Korean won, which is not a reserve currency, causing exchange rate volatility. Recent rises in oil prices and public utility fees also pose challenges. Im Jae-kyun, a researcher at KB Securities, noted, "The pace of inflation slowdown may be slow due to upcoming public utility fee hikes," adding, "If international oil prices rise again and domestic core inflation slows sluggishly, the timing of rate cuts could be delayed."
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