BOK freezes key rate, announces decade-high inflation outlook

South Korea’s central bank on Thursday kept its benchmark interest rate anchored at the current 1.25 percent, but sharply revised its annual inflation outlook to a decade high of 3.1 percent.

The Bank of Korea’s seven-day monetary policy board unanimously voted to freeze the key rate at the level it maintained since it delivered a 0.25 percentage point rate hike in January. The January decision brought back the base rate to pre-pandemic levels, before the BOK carried out a 0.5 percentage point rate cut to 0.75 percent in March 2020 and another 0.25 percentage point cut to a record-low of 0.5 percent two months later to cope with COVID-19 pandemic woes. It ended the record-low interest rate in August last year by raising the rate to 0.75 percent in August, followed by two additional rate hikes in November 2021 and January this year.

“It will be appropriate to continue adjusting the pace of monetary easing, with the prolonged high inflationary pressure and the need to resolve financial imbalance,” BOK Gov. Lee Ju-yeol said, hinting at further rate hikes in a press briefing tied to the policy meeting.

Nodding to the upward inflationary pressure, the BOK raised its annual inflation outlook by 1.1 percentage points from its previous November reading to 3.1 percent. This marks the highest reading in a decade since the 3.2 percent outlook announced in April 2012.

The BOK said that that consumer price inflation has recently remained high in the mid- to upper-3 percent range due to the ongoing sharp rise in the prices of petroleum products, as well as the accelerating increase in the prices of personal services and industrial products. Government data showed that consumer prices gained 3.6 percent on-year in January, hovering over the 3 percent mark for fourth consecutive months.

The surging global oil prices, the prolonged global supply bottleneck and the mounting tensions between Russia and Ukraine have been key factors driving up the inflationary pressure. Lee said that a full-blown conflict in the central European region could further affect the inflation here.

“Because both Russia and Ukraine account for a large part of the global raw material market, a full-blown conflict could lead straight to a noticeable inflationary pressure here,” Lee said.

“On top of that, the global economic sanctions against Russia is likely to affect global trade and eventually Korea’s manufacturing and exports.”

Russia’s recent move to deploy forces into Ukraine’s eastern front has prompted the US to announce economic sanctions against Russia.

Despite concerns surrounding inflation, the BOK kept its economic forecast for this year steady at 3 percent.

Lee hinted that the BOK’s rate by the end of the year will be within the 1.75 percent to 2 percent range by agreeing to the market projections claiming the range.

The nation’s economy expanded by an estimated 4 percent last year, a noteworthy rebound from 2020, when it shrank by 0.9 percent. The 2020 figure was the country’s worst performance since 1998, when it was reeling from the 1997 Asian financial crisis.

Thursday’s monetary policy meeting was the last one chaired by Lee as he is set to step down as chief of the central bank in end-March. The next rate-setting meeting is scheduled for April 14.

By Jung Min-kyung (mkjung@heraldcorp.com)