The Monetary Policy Board of the Bank of Korea (BOK) has decided to maintain the key interest rate at the existing level of 3.50 percent. Despite the domestic inflation rate falling to the 2 percent range, it is deemed difficult to consider it as having reached a stable level, especially considering factors such as record-high household debt.
On the morning of Feb. 22, the BOK convened its regular Monetary Policy Board meeting and decided to maintain the key interest rate at the current level of 3.5 percent. The central bank has kept the rate unchanged since it was raised from 3.25 percent to 3.5 percent in January last year. With the latest decision to keep the rate steady once again, the key interest rate has now remained unchanged for the 9th consecutive time.
The BOK has repeatedly stated that it will sustain a monetary tightening stance for a considerable period until it is confident that the inflation rate will converge to the target level of 2 percent. It has emphasized its intention to maintain an independent monetary policy stance, considering domestic consumer prices, even amid the possibility of interest rate cuts by the U.S. Federal Reserve System. Premature rate cuts could stimulate inflation expectations, leading to concerns that the inflation rate may rise again.
In January of this year, the inflation rate rose by 2.8 percent compared to the same month of the previous year. It dropped to the 2 percent range for the first time in six months since July last year when it was 2.4 percent. However, the BOK maintains a cautious stance, noting that although the recent inflation rate has shown a slowdown, uncertainties remain high and vigilance needs to be maintained.
During the inflation status review meeting held on the 2nd, BOK Deputy Governor Kim Woong stated, “The consumer price inflation rate continues its slowdown trend due to weakened demand pressure and the decline in international oil prices.” However, he also explained, “Considering the significant uncertainty surrounding oil prices due to geopolitical risks as well as the persistently high prices of agricultural and other daily necessities, it cannot be ruled out that the slowdown trend may temporarily reverse, leading to a slight increase.”
Household debt also acts as a barrier to interest rate cuts. As of the end of last month, the balance of household loans from deposit banks reached a record high of 1,098.4 trillion won (US$827.11 billion). The increase amounted to 3.4 trillion won, expanding from the previous month’s 3.1 trillion won. The balance of housing mortgage loans continued its upward trend for the 11th consecutive month, rising by 4.9 trillion won from the previous month to 855.3 trillion won. Although the growth rate decreased compared to December last year, which stood at 5.1 trillion won, it was the second-largest increase on record as of January.
Meanwhile, the BOK maintained its revised economic outlook on the same day, keeping the forecast for this year's economic growth rate and consumer price inflation rate at 2.1 percent and 2.6 percent, respectively. These figures remain unchanged from the economic forecast released in November last year.