BOK keeps rate at 3.5%, cuts growth projection to 2.4%

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 25 basis 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.

The Korea-US rate gap was maintained at its widest-ever of 2 percentage points, but 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.

The currency appreciation was backed by the strong anticipation that the US Federal Reserve would 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 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."

Market analysts viewed the policy bank will cut its rate in the fourth quarter of this year.

“Considering the rise in the real interest rate from disinflation could negatively affect the economy, the BOK is likely to ease down on its monetary tightening policy soon,” analyst Ahn Ye-ha at Kiwoom Securities said, adding the BOK is likely to cut the rate in October.

Park Seok-gil, economist at JPMorgan, projected the central bank would require more time to execute a rate cut.

“We now see a 25-basis point rate cut to be more likely in November rather than October, as the BOK prefers to have sufficient time to assess financial stability risks before a rate cut,” Park said.

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.