▲ The Bank of Korea
The Bank of Korea (BOK)'s Monetary Policy Board kept its base interest rate unchanged at 3.00% today (October 22), matching market expectations.
While maintaining a tightening stance in the face of strong growth and upward pressure on inflation, the decision appears to be a temporary pause to evaluate the impact of consecutive rate hikes in July and August.
Attention is now shifting to whether an additional rate hike will occur in November.
Previously, the Monetary Policy Board cut rates four times—in October and November 2024, and February and May of last year—before freezing rates for eight consecutive meetings through May of this year.
Following that, considering the economic rebound driven by strong semiconductor exports and inflation caused by the fallout from the Middle East conflict, the BOK resumed rate hikes in July for the first time in three years and six months.
It tightened monetary policy further by raising rates once again in August.
During the August rate hike, BOK Governor Rhee Chang-yong emphasized the necessity of preemptive action, citing the Korean proverb, "A stitch in time saves nine."
The Monetary Policy Board maintains its tightening stance because core variables such as inflation, growth, and housing prices all support raising interest rates.
Inflation continues to show a high upward trend.
Consumer price inflation gradually rose to 2.6% in April, 3.1% in May, and 3.2% in June of this year, before fluctuating to 2.8% in July, 3.1% in August, and 2.9% in September.
With international oil prices soaring, inflation is projected to hover around 3% in October as well.
Governor Rhee has repeatedly stated his commitment to taking action until there is confidence that the inflation rate converges toward the target level (2.0%).
Growth expectations are also rising steadily.
The real gross domestic product (GDP) growth rate rebounded sharply from -0.1% in the fourth quarter of last year to 1.8% in the first quarter of this year, and exceeded expectations at 0.6% in the second quarter.
The accumulated current account surplus for January to August of this year reached 27.92 billion dollars, more than four times that of the same period last year.
In its economic outlook released last August, the BOK significantly raised its annual growth forecast for this year from 2.6% to 3.3%, while suggesting a maximum of over 3.6% under an optimistic scenario.
There is ongoing speculation that the forecast could be revised upward during the November economic outlook to reflect the continued expansion of semiconductor exports.
The housing market and household debt conditions are also cited as key considerations for monetary policy.
Despite a series of real estate measures by the government, high price increases persist, centered on mid- to low-priced homes in the Seoul outskirts and the southern Gyeonggi region.
Household loans from major commercial banks showed a rare decline last month, but turned back to an upward trend this year.
An increase in credit loans is also notable amid widening stock market volatility.
In addition, the pace of rate hikes by major countries is another variable.
The U.S. Federal Reserve (Fed) abruptly raised its base interest rate to 3.75–4.00% last month, despite pressure for a cut from President Donald Trump.
While the Federal Open Market Committee (FOMC) meeting scheduled for October 27–28 is widely expected to result in a freeze, analysts believe the embers of an additional rate hike within the year remain alive.
The sharp decline in the exchange rate acts as a factor alleviating the immediate need for a rate hike.
The won-dollar exchange rate fell as low as 1,322.8 won during intraday trading yesterday due to dollar selling by exporters.
Based on intraday lows, this was the lowest level since October 2, 2024 (1,317.1 won).
Governor Rhee has maintained that narrowing the interest rate gap between South Korea and the United States helps restore the fundamental value of the Korean won.
At the same time, the Monetary Policy Board appears to be considerably mindful of the increasing burden placed on vulnerable borrowers by rate hikes.
When releasing the financial stability situation last month, the BOK mentioned that a 0.25 percentage point rise in interest rates would increase the interest burden by approximately 3.3 trillion won for households and 3.6 trillion won for corporations.
Subsequently, during a parliamentary audit on October 12, Governor Rhee made remarks suggesting that vulnerable borrowers would suffer from monetary policy, emphasizing the importance of the government's role.
Hwang Gun-il, a member of the Monetary Policy Board, previously cast a dissenting vote for a rate freeze during the August meeting, pointing out the need to consider deepening polarization and vulnerable sectors.
The market expects that the Monetary Policy Board is highly likely to pursue an additional rate hike as early as next month.
The preliminary real GDP growth rate for the third quarter, to be released on October 27, and October inflation indicators, coming out on November 2, are expected to influence policy decisions.
The final monetary policy direction meeting of this year is scheduled for November 26.
Park Jeongwoo, an economist at Nomura Securities, stated that inflation remains high and the housing market has not stabilized, making additional rate hikes appear necessary.
Governor Rhee is personally explaining the background of today's base rate decision and the future monetary policy direction during a press conference held around 11:10 a.m. today.
(Photo: Yonhap News)
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