Bank of Korea keeps key interest rate at 3.5 percent

The Bank of Korea on Thursday froze its benchmark interest rate at 3.5 percent following rate hikes for the past one and a half years, putting the brakes on the upward movement that fueled concerns about an economic recession and left citizens with financial burdens. However, BOK Governor Rhee Chang-yong stated that the move should not be seen as an end to the rate increase, implying that there is still a chance of higher interest rates.

The central bank’s monetary policy board on Thursday held a meeting to determine the direction of monetary policy and confirmed that the current key interest rate of 3.5 percent would stay unchanged. The BOK made ten-time interest increases by 3 percentage points from 0.5 percent, almost zero in August 2021. Starting last April, it raised rates seven times consecutively.

It is considered that the BOK froze the key interest rate amid growing concerns over an economic downturn. In the fourth quarter of last year, South Korea showed a negative growth (-0.4 percent). Also, there are signs that the country will still record negative growth rates by the first quarter of this year. As part of the BOK’s Thursday announcement, its 2023 growth outlook was adjusted down by 0.1 percent points from 1.7 percent to 1.6 percent, given decreases in exports and the slowing domestic market.

Governor Rhee said in a press conference that the central bank concluded that it is deemed proper to look closely at various factors that bring uncertainties with the current key interest rate left unchanged. He explained that economic uncertainties are attributable to the pace of slow inflation, the U.S. Federal Reserve’s final interest rate target, the effects of economic recovery in China on the South Korean market, financial stability in the real estate market and the ripple effects of rate hikes.

However, Governor Rhee stressed that it should not be considered a sign that the trends of the rate hikes are over, meaning that it is only a brief pause not a definite end.

In fact, there is still a chance of higher interest rates this April. Regarding the central bank’s final interest target, the governor said that only a member of the monetary policy board favored the current level of 3.5 percent, but five supported keeping the possibility of 3.75 percent open for some time.

The U.S. Federal Reserve is expected to keep its austerity policy for the time being. According to the minutes of the recent regular meeting released by the Fed on Wednesday (local time), most participants in the session agreed to slow down the pace of the hikes by raising the rates by 0.25 percent points, but some argued that the rates should rise considerably by 0.5 percent points. Experts project that the Fed will increase its benchmark rates three times in March, May, and June up to 5.5 percent and keep it fixed by the end of this year.


Min-Woo Park minwoo@donga.com