Bank of Korea Keeps Interest Rate Unchanged

On Thursday, the Bank of Korea’s Monetary Policy Board voted to keep the key interest rate unchanged at 3.5 percent. This decision was made despite inflation continuing to be above the target level and uncertainties surrounding the policy decision being judged high.

Global Economic and Financial Trends

The slowdown of global economic growth and inflation has continued. Still, concerns about a recession in major countries have somewhat decreased due to the easing of concerns over energy supply and demand, as well as favorable labor market conditions. In global financial markets, volatility in major price variables has increased, with the U.S. dollar shifting to a rapid strengthening after continuing to weaken and long-term market interest rates rebounding considerably.

Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected largely by the pace of global inflation slowdown, monetary policy changes in major countries and U.S. dollar trends, the recovery in the Chinese economy after the easing of its COVID-19 restrictions, and geopolitical risks.

Domestic Economic Trends

Domestic economic growth has continued to slow, with the recovery in private consumption weakening and exports decreasing due to deepened sluggishness in the IT industry. Labor market conditions have generally continued to be favorable, but the decline in the increase in the number of persons employed has continued due to the economic slowdown. As we advance, domestic economic growth is expected to remain weak, affected by the global economic slowdown and the increase in interest rates. Domestic economic growth is expected to improve gradually from the second half of this year with a recovery in the Chinese economy and in the IT industry. However, uncertainties regarding the outlook are judged to be high.

Inflation Trends

Consumer price inflation ran at 5.2 percent in January, which was higher than 5.0 percent in December, due to increased electricity fees and rising prices of processed food products. However, increases in the price of petroleum products have been moderated. Core inflation (excluding changes in food and energy prices from the CPI) ran at 4.1 percent in January. Short-term inflation expectations among the general public have run at 4.0 percent in February. Looking ahead, it is forecast that consumer price inflation will remain around 5 percent in February but gradually decrease owing to the base effect of the sharp rises.

Related Facts

• Global economic growth and inflation have continued to slow.
• Domestic economic growth has continued to slow, with the recovery in private consumption weakening and exports decreasing.
• Consumer price inflation ran at 5.2 percent in January.
• Core inflation ran at 4.1 percent in January.
• Short-term inflation expectations among the general public have run at 4.0 percent in February.

Key Takeaway

The Bank of Korea’s Monetary Policy Board voted to keep the key interest rate at 3.5 percent. This decision was made despite inflation continuing to be above the target level and uncertainties surrounding the policy decision being judged high. Global economic growth and financial markets are expected to be affected by the pace of global inflation slowdown, monetary policy changes in major countries and U.S. dollar trends, the recovery in the Chinese economy after easing its COVID-19 restrictions, and geopolitical risks. Domestic economic growth is expected to remain weak. Still, it is expected to improve gradually from the second half of this year with a recovery in the Chinese economy and the IT industry.

Conclusion

The Bank of Korea’s decision to keep the key interest rate unchanged at 3.5 percent reflects the uncertain economic environment. The Board sees global economic growth and financial markets as likely to be affected by various factors, while domestic economic growth is expected to remain weak. Inflation is expected to remain around 5 percent in February but will gradually decrease due to the sharp rise’s base effect.