The Bank of Korea Freezes Key Interest Rates at 1.5%

Bank of Korea (BOK) Governor Lee Ju-yeol said on May 24 that the BOK still maintains its earlier forecast that the country’s economy would grow 3 percent in 2018. However, he added that the central bank cannot take a rosy view as uncertainties at home and abroad are rising. The BOK recently froze its benchmark interest rate, taking into consideration the recent economic slowdown and worsening labor market, but it is more likely to raise its benchmark interest rate in July due to growing concerns over the interest rate reversal between Korea and the United States.

The Monetary Policy Board (MPB) of the BOK convened on May 24 and made a unanimous decision to keep the key interest rates at 1.50 percent a year. “Since the domestic economy has continued to show a relatively steady growth, we don’t think it is necessary to revise our April forecast of 3 percent GDP growth this year. Yet we will monitor the economy more closely as uncertainties at home and abroad are growing,” said Lee at a press conference after the rate-setting meeting.

MPB members voted for keeping the rate unchanged because the job market is getting worse and there are little pressure on inflation. The BOK said, “Consumption and exports have shown favorable movements, though facilities investment has slowed somewhat. However, the job market has come up short as the rise in employment has continued to remain low.”

However, the BOK expressed great concerns over the growing capital outflow from emerging countries due to the recent rise in U.S. interest rates, implying a possible hike in the nation’s benchmark interest rates in the second half of the year. In April, the BOK flatly said the capital outflow caused by the interest rate reversal between Korea and the U.S. is not at an alarming level. However, U.S. capital has fled mainly from emerging countries, threatening the global economy.

The fact that business indicators, including employment, haven’t recovered is still a problem for the BOK. The country's consumer price index (CPI) rose 1.6 percent year on year in April, falling short of 2 percent of the BOK’s price stabilization target. The growth of employment has remained at some 100,000 for three months in a row, being at its worst.

To make matters worse, there are also growing concerns over stagflation, a condition of slow economic growth and relatively high unemployment accompanied by a rise in prices or inflation, as skyrocketing oil prices are most likely to drag down prices which have stood firmly. International Brent crude oil prices climbed to US$79.80 (86,104 won) a barrel on the 24th, approaching the US$80 (86,320 won) mark.

Market experts said the BOK would raise the key interest rates once in July. Kim Myung-sil, an analyst at KTB Investment & Securities Co., said, “We need to see whether hawkish opinions have appeared at the minute book after Lim Ji-won, a senior economist at JP Morgan, joined as a new voting MPB member and employment has rebounded after executing a revised supplementary budget. If the inflation rates exceed 1.5 percent in May and June, the BOK has good reason to raise the benchmark interest rates in July.”