September 13, 2024

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Bank of Korea Gov. Rhee Chang-yong leads the Monetary Policy Committee meeting in Seoul on Thursday. (Joint Press Corps-Yonhap)

The Bank of Korea kept the base rate steady at 3.5 percent Thursday while slashing the projection for economic growth by 0.1 percentage point to 2.4 percent due to slow domestic demand.

All members of the monetary policy board agreed on the rate freeze. Of the six members, excluding BOK Gov. Rhee Chang-yong, four suggested leaving room for a rate cut within the next three months, according to Rhee.

With the rate decision, the BOK has kept the rate steady for the 13th straight time since it raised the rate by 0.25 percentage points over a year and a half ago in January 2023.

“The board froze the rate as we can respond to a slowdown in domestic consumption with time, but in terms of financial stability, the risks could potentially grow if we do not react to related signals immediately,” Rhee said at a press conference, held shortly after the rate-setting decision.

“In terms of inflation level, the circumstances for a rate cut has been formed,” he said, indicating Korea is on a path of disinflation.

Though consumer price growth rebounded to 2.6 percent in July, sparked by the surge in oil prices, the metric has been moving down in general, reflecting an ease in inflationary pressure.

“But considering the financial stability or global risk factors, the current monetary tightening policy will be maintained. We will decide on the depth and timing of the cut, keeping a close watch on the policy variants of price, growth and financial stability,” Rhee said.

Though the Korea-US rate gap was maintained at its widest-ever of 2 percentage points, the value of the Korean won against the US greenback has recently strengthened, reaching the 1,320 won range on Tuesday for the first time in five months, backed by the anticipation that the US Federal Reserve will start to cut its rate in September.

“If the US Fed was to more definitively move to a rate cut, we may be able to put more weight on domestic factors when operating the monetary policy, instead of stressing on international ones as we have done in recent one or two years,” Rhee said.

The Korean central bank slashed the projection for this year's gross domestic product growth by 0.1 percentage point to 2.4 percent, reflecting the slowdown in private consumption. It took a step back from how it had raised the forecast from 2.1 percent to 2.5 percent in May.

“The improvement in the economy in the first quarter was influenced by transitory factors, including consumption,” Rhee said. “The projection was technically pulled down in assessment that the rise in May was somewhat excessive. It does not refer to a change in the underlying trend.”

The growth forecast is lower than those suggested by other institutions, such as the 2.6 percent from the government and the Organization for Economic Cooperation and Development, and the 2.5 percent from the Korea Development Institute and the International Monetary Fund.

The BOK’s projection on private consumption growth for this year was cut by 0.4 percentage points to 1.4 percent.

While pressure has been building on the BOK to cut its rate, Rhee maintained that the central bank’s role lies in achieving financial stability.

"Housing prices and household debts are important factors that impact financial stability," Rhee said. "Members of the monetary policy board have made it clear that the BOK will not provide excessive liquidity through its monetary policy, which could encourage the rise in housing prices."

The 3.5 percent base rate will be maintained at least until the BOK’s next monetary policy meeting, set to take place on Oct. 11.

By Im Eun-byel (silverstar@heraldcorp.com)