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Bank of Korea keeps rate, growth forecast steady

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Bank of Korea Gov. Rhee Chang-yong speaks in a press conference held at the bank in central Seoul on Thursday following the Monetary Policy Board meeting held earlier on the day. [NEWS1]
Bank of Korea Gov. Rhee Chang-yong speaks in a press conference held at the bank in central Seoul on Thursday following the Monetary Policy Board meeting held earlier on the day. [NEWS1]

The Bank of Korea (BOK) kept the key rate unchanged at 3.50 percent on Thursday for a fifth consecutive time.

It was a unanimous decision by the Monetary Policy Board, although six board members said they were open to raising the rate to 3.75 percent. There are seven Monetary Policy Board members, including the BOK Gov. Rhee Chang-yong, who sits as the board chairman.

“Uncertainties in the Federal Reserve’s monetary policy are very high,” Rhee said at the press conference held at the bank’s office in central Seoul on Thursday.

“The possibility of expanded volatility in the foreign exchange market cannot be excluded depending on the policy direction following the Jackson Hole Economic Symposium and the Federal Open Market Committee [FOMC].”

The two-day FOMC meeting kicks off on Sept. 19.

The current rate differential between Korea and the United States is at a record high of 2 percentage points.

Rhee added it is too early to discuss a rate cut and highlighted growing household debt.

“Household debt grew faster than we had expected over the past two months,” Rhee said. “The debt may grow for a couple more months due to the time lag. But the bank and the financial authorities agree on the need to gradually reduce household debt through microeconomic measures to make sure households debt to GDP ratio doesn’t grow.”

He added, “We’ll take microeconomic measures to control household debt. But if the debt grows larger or if the measures are ineffective in the market, we could consider macroeconomic policy, although we haven’t reached that situation yet.”

Korea’s total household credit, which refers to credit purchases and loans to households by financial institutions, stood at 1,862.8 trillion won at the end of June, up 0.5 percent from three months earlier. It was the fastest percentage gain since the fourth quarter of 2021.

“The Monetary Policy Board is expected to keep the rate at 3.50 percent for a considerable time as the expected timing of the Fed pivot has been delayed to the middle of next year,” Mirae Asset Securities analyst Min Ji-hee said in a report on Thursday.

The Federal Reserve raised its interest rates to a 22-year high in July, upping the federal funds rate from 5.25 percent to 5.5 percent.

Traders bet policymakers are unlikely to raise interest rates further in 2023 but expect cuts from early next year, according to Reuters.

The BOK on Thursday projected the Korean economy to grow 1.4 percent this year, unchanged from its May forecast. Its forecast for next year’s economic growth was cut to 2.2 percent from the previous 2.3 percent projection.

“The improvement in private consumption and exports has slowed recently and is expected to gradually improve in the second half of the year due to a modest recovery in consumption and an easing of the export slump,” the BOK said in a statement.

The statement also highlighted uncertainties in the Chinese economy and international energy prices.

The bank forecast consumer prices to grow 3.5 percent this year, unchanged from the May projection, but raised the forecast for core inflation to 3.4 percent from the previous 3.3 percent.

It also noted global oil price movements, weather conditions and pass-through of accumulated cost increases as the reasons for the revised projection.

BY JIN MIN-JI [jin.minji@joongang.co.kr]