South Korea’s central bank on Thursday froze its policy rate for the third successive time this year on the back of lower inflationary pressure and greater worries about an economic downturn.
Bank of Korea (BOK) Governor Rhee Chang-yong and other monetary policymakers decided to leave the benchmark seven-day repurchase rate unchanged at 3.50 percent.
It was in line with market expectations. According to the Korea Financial Investment Association’s poll of 100 fixed-income experts, 89 percent predicted the rate freeze this month.
The BOK put the rate on hold in February and April after delivering seven back-to-back rate hikes by 3.0 percentage points between August 2021 and January 2023.
The successive rate freeze came amid lower inflationary pressure. The country’s consumer prices rose 3.7 percent in April from a year earlier, falling below 4 percent in 14 months.
Inflation expectations, which measure the outlook among consumers over headline inflation, slipped 0.2 percentage points over the month to 3.5 percent in May.
The BOK said in a statement that the consumer price inflation was expected to fall considerably owing to the base effect from the sharp rise in global oil prices last year, noting that the headline inflation will fluctuate at around the 3 percent level until the end of this year.
Concerns deepened over an economic slump due to weaker global demand for South Korean products and higher borrowing costs that roiled the real estate market.
The country’s export continued to slide for the seventh consecutive month in April, leading to trade deficits for 14 months in a row.
The BOK said the domestic economic growth continued to slow down with the ongoing sluggishness of investment and export, forecasting that the economic growth was expected to remain weak for some time.
Higher borrowing costs would expand the debt-servicing burden for households struggling with massive debts that would negatively affect the already faltering real estate market.
Mortgage loans to households increased in the January-March quarter due to the supply of government-backed mortgage loans, but it could be temporary amid the high borrowing costs and the economic slowdown.
Expectations remained for the BOK to hike rates owing to the still high inflation and a wider gap between the South Korean and the U.S. interest rates.
The consumer price inflation of 3.7 percent in April far exceeded the BOK’s mid-term inflation target of 2 percent.
The U.S. Federal Reserve lifted its target range for the federal funds rate by 25 basis points to 5.00 percent-5.25 percent in early May, widening the gap with South Korea’s policy rate.
The Fed’s rapid rate hikes put the BOK on alert as the belated response may force foreign capital out of the South Korean financial market and cut the value of the domestic currency versus the greenback.
The local currency’s depreciation would increase import costs for raw materials, putting inflationary pressure on the South Korean economy.