BOK Maintains Benchmark Interest Rate for 8th Consecutive Time

The Bank of Korea (BOK) has decided to maintain the benchmark interest rate at 3.50 percent during its first Monetary Policy Committee meeting of the year, marking the “eighth consecutive” freeze. This decision is interpreted as a cautious stance, considering the ongoing global trend of major central banks, including the Federal Reserve (Fed), concluding their interest rate hike cycles. The bank is closely monitoring domestic factors such as the slowdown in inflation, the rise in household debt, and developments in the real estate project financing (PF) market.

From 2022 to January of last year, the Monetary Policy Committee had raised the benchmark interest rate seven consecutive times. Following this, the committee decided to keep the benchmark interest rate unchanged for seven consecutive meetings since February of last year, and the decision for another freeze has now been made.

The market widely anticipated that the BOK would maintain the benchmark interest rate at the current 3.50 percent again, following the decision in November last year.

The market expects that there will be time to observe the future monetary policies of the Fed and the domestic trend of inflation deceleration, with the BOK maintaining the interest rate at its first Monetary Policy Committee meeting this year. Considering concerns such as the crisis triggered by Taeyoung Engineering & Construction in the real estate PF market, there is an assessment that there is limited room for further interest rate hikes.

There is also speculation that the BOK may lower the interest rate after confirming the Fed’s interest rate cut. In the market, the first rate cut by the Fed is anticipated to be in May. According to the Chicago Mercantile Exchange (CME) FedWatch, there is a 96.7 percent probability, based on the federal funds (FF) rate futures market, that the Fed will cut interest rates in May.

However, considering the current economic situation in South Korea, there is a diagnosis that discussions on the benchmark interest rate cut may be premature. The continued rise in household debt, coupled with inflation still not significantly exceeding the target, is a factor. There are also concerns that a rapid reduction in the benchmark interest rate could, in fact, contribute to an increase in household debt.

The Monetary Policy Committee also adheres to the stance that discussions on interest rate cuts can only take place when inflation converges to the target level in the 2 percent range. As of December last year, the consumer price index had risen by 3.2 percent, still falling short of the target level of 2 percent.

Household debt, which had shown a continuous increasing trend for eight consecutive months from April to the end of last year, reached a record high at the end of the third quarter. The outstanding household credit balance stood at 1,875.6 trillion won, marking an increase of 14.3 trillion won compared to the previous quarter.

There is a keen market interest in when the BOK will lower the interest rates. Experts predicted that the bank would begin cutting interest rates from the second to third quarter before the Monetary Policy Committee decision. They anticipated that the BOK could reduce interest rates by as little as 25 basis points twice or as much as three times this year.