The Bank of Korea kept its key interest rate unchanged at 3.5 percent Thursday, opting for a third consecutive freeze as inflation has been showing signs of easing off in Korea in recent months.
Korea’s base rate has stayed at 3.5 percent since February, when the central bank first froze the rate after more than a year of rate hikes to tamp down soaring prices.
“The BOK decided to keep the rate unchanged as it is appropriate to maintain the monetary tightening stance, with the inflation expected to remain above the target level for a considerable time though it has been slowing down,” BOK Gov. Rhee Chang-yong said at a press briefing held shortly after a rate-setting meeting.
The BOK’s target inflation level is 2 percent. The consumer price, an inflation gauge, increased by 3.7 percent on-year in April, coming down from the 4.2 percent in March.
Despite the third rate freeze, Rhee warned against market expectations of a rate cut happening within the year.
"Unless there is a definite proof that inflation will fall to the 2 percent range, it is premature to mention a rate cut,” he said, adding that the board members agreed to have the terminal rate stand at 3.75 percent for the time being.
"The BOK needs to watch out against the US Federal Reserve’s rate decision amid high uncertainty, rather than being hasty,” Rhee said, further explaining this does not mean the central bank will "mechanically" follow the Fed's decision.
Though Rhee maintained a hawkish stance, the bank's decision falls in line with market expectations that the BOK will maintain the rate as inflation has been showing signs of easing and the economy remains slow.
With the latest rate freeze, the Korea-US key rate gap remains at up to 1.75 percentage points. The market projects the US Federal Reserve will hold the rate at its rate-setting meeting in mid-June for the first time in more than a year, ending its aggressive monetary tightening cycle.
Rhee explained the currency has remained stable despite the widened gap in the base rates. The Korean won against the US dollar closed at 1,326 won, slightly weakening from its opening price at 1,319 won, Thursday.
“We have to break away from the perception that the gap in the key rates decides the currency,” Rhee said. “Of course, the differential is important, but it is not the sole factor.”
Meanwhile, the BOK announced a new projection for the economic growth rate of 2023 and 2024 for Korea.
It lowered Korea’s economic growth rate for 2023 to 1.4 percent, from its previous projection of 1.6 percent made in February, in concern of the sluggish economy and exports.
"We lowered the growth rate projection as the IT industry is slow to rebound and the effects of China's reopening have been delayed than initially expected," Rhee said. "In the second half of the year, the external conditions will be somewhat resolved, and the economy is likely to pick up.”
It projected the Korean economy will grow by 2.3 percent in 2024.
As inflation is on the path projected by the central bank -- continuously easing off during the first half of 2023 -- it maintained the consumer price inflation at 3.5 percent for 2023, while projecting 2.4 percent for 2024.
However, Rhee added that the uncertainty of the inflation rate for 2024 is higher than that of 2023, as the recent fall in prices stem from the base effect of the spike in oil prices in 2022.
With the BOK maintaining the rate, the market will await the US Fed's Federal Open Market Committee meeting set to be held on June 13-14. The next rate-setting meeting for BOK is slated to take place on July 13.