Will the Bank of Korea Keep the Base Rate Steady...Possibility of Upward Revision in Growth Rate Increases

May 23 Bank of Korea Monetary Policy Direction Meeting
Revised Economic Outlook for May Announced on the Same Day

[Image source=Yonhap News]

On the 23rd, the Monetary Policy Committee (MPC) of the Bank of Korea (BOK) will hold a meeting to decide the base interest rate. On the same day, the BOK is also expected to release a revised economic outlook. Attention is focused on whether the base rate, which has been held steady for 10 consecutive times at the current level (3.5% per annum), will be maintained and whether the economic growth forecast will be revised upward following the surprise growth in the first quarter.

Ahead of the MPC meeting, many in the market expect the BOK to keep the base rate unchanged for the 11th consecutive time. This is due to the Federal Reserve's (Fed) pivot expectations being postponed to September and the continued high uncertainty surrounding inflation.

The consumer price inflation rate maintained the 3% range in February (3.1%) and March (3.1%) this year, but last month it recorded 2.9% year-on-year, entering the 2% range for the first time in three months. However, instability in fruit prices such as pears and apples continues, making it difficult to be confident about the stabilization in the 2% range.

At the inflation situation review meeting on the 2nd, Deputy Governor Kim Woong said, "Going forward, the consumer price inflation rate is expected to slow down mainly due to core inflation (excluding energy and food)," but added, "There is still significant uncertainty related to oil price trends and periods of strong agricultural product prices."

At this MPC meeting, the revised economic outlook will also be announced. Earlier, in February, the BOK projected this year's annual growth rate at 2.1% and inflation rate at 2.6%. However, with the first quarter gross domestic product (GDP) growing 1.3% quarter-on-quarter, far exceeding market expectations, there is strong anticipation that the growth forecast will be revised upward.

In fact, after the first quarter GDP was announced, global investment banks (IBs) such as JP Morgan and Goldman Sachs have successively raised their economic growth forecasts for South Korea. They analyzed that although the Korean economy showed a surprise growth, it is difficult to be certain about a full-fledged recovery. They also assessed that the timing of the BOK’s base rate cut could be further delayed.

Governor Lee, at a press conference on the 2nd, cited ▲the delay in changes to U.S. monetary policy ▲better-than-expected economic indicators ▲increased volatility in oil prices and exchange rates due to geopolitical risks as reasons, stating, "The situation has changed significantly since the April monetary policy meeting," and "The April meeting cannot serve as the basis for the May meeting."

Meanwhile, at this MPC meeting, newly appointed members Lee Soo-hyung and Kim Jong-hwa will attend for the first time, replacing former MPC members Cho Yoon-je and Seo Young-kyung who have retired.