The Bank of Korea has decided to maintain its benchmark interest rate at 3.00% in October, following two consecutive rate hikes in July and August. This move indicates a moderation in its tightening pace. However, given stronger-than-expected economic growth and inflationary pressures, the central bank is likely to continue its tightening stance.
During a monetary policy meeting on October 22, the Bank of Korea's Monetary Policy Committee unanimously agreed to keep the interest rate at 3.00%. This marks the first pause after raising the rate from 2.50% to 2.75% in July and then to 3.00% in August. The decision to hold rates steady is interpreted as a measure to assess the impact of the previous rate increases.
Bank of Korea Governor Shin Hyun-song stated, "By raising rates consecutively, we have gained some flexibility in our policy. We have secured the capacity to implement policies that align with domestic conditions without being swayed by market situations." He referred to the August rate hike as a necessary action, saying, "This pause is the fruit of that decision."
The outlook for future monetary policy remains hawkish. With growth and inflation trends proving stronger than initially expected, the need for further tightening persists. Governor Shin emphasized, "Given that the growth and inflation trends are stronger than in August, we need to continue our tightening policy until we are confident that inflation stabilizes at our target level."
In its economic assessment released on the same day, the Bank of Korea projected that this year's and next year's economic growth rates would significantly exceed the previous forecasts of 3.3% and 2.9%, respectively. In May 2024, when the Bank used the term "significantly exceed" in its growth rate forecast, it raised its previous estimate from 2.1% to 2.5%.
Inflation forecasts are also expected to be revised upward. The Bank indicated that while this year's consumer price and core inflation rates are likely to align with previous estimates of 2.7% and 2.5%, next year's rates are expected to exceed the earlier projections of 2.3% and 2.5%. This is due to accumulated cost pressures combined with demand-side inflationary pressures.
Analysts suggest that the decision to hold rates steady is more of a temporary adjustment to assess the effects of previous rate hikes rather than a shift in the tightening policy, leaving the door open for potential increases next month. With additional indicators such as third-quarter GDP and October consumer prices to be released, along with revised economic forecasts, the basis for determining future rate hikes is expected to become clearer.
Choi Ji-wook, managing director of macro strategy at State Street Market Asia-Pacific, noted that the Bank of Korea believes the third-quarter economic growth rate will reflect continued strong performance, predicting a growth rate in the upper 0% range compared to the previous quarter.
The market anticipates an additional rate hike in November. Choi stated, "Despite the unanimous decision to hold rates, the accompanying statement was somewhat more hawkish than market expectations. Given the increased likelihood of upward revisions to growth and inflation forecasts, we maintain our outlook for an additional hike at the November meeting."
Kim Myung-sil, a researcher at iM Investment & Securities, remarked, "The key takeaway from this hawkish signal is the reaffirmation that the freeze does not signify an end to tightening, while also strengthening the upside risks to growth and inflation forecasts. We expect a 0.25 percentage point increase in the November benchmark rate."
* This article has been translated by AI.
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