The Bank of Korea (BOK) froze its benchmark interest rate at 1.5% at the Monetary Policy Committee meeting on July 12 amid the ongoing trade war between the United States and China and signs of an economic slowdown. At the meeting, one of the seven members of the committee proposed a benchmark rate increase of 0.25 percentage points. Under the circumstances, those in the financial sector are predicting that the rate may be adjusted upward next month or in October.
The central bank is ruling out the possibility though. “With international financial volatility on the rise, capital outflow attributable to an interest rate difference should be monitored,” BOK Governor Lee Ju-yeol explained, adding, “The single member’s opinion does not represent the entire committee.” This implies adjustment in October is more likely than adjustment in August.
If the Fed raises its key rate again in September to further widen the interest rate gap, an upward adjustment can become more persuasive. At present, the U.S. benchmark rate is 0.5 percentage points higher than that of South Korea. According to some experts, the difference may increase to one percentage point within this year.
That day, the central bank adjusted its economic growth forecast for this year from 3.0% to 2.9% and for next year from 2.9% to 2.8% in three months. The bank’s forecast for this year is more pessimistic than those of the South Korean government, the IMF and the OECD. That of the Korea Development Institute, a government-run research institute, is equal to the central bank’s and each of the Hyundai Research Institute and the LG Economic Research Institute in the private sector is estimating the rate at 2.8%.
The BOK’s growth forecast adjustment is because of sluggish investment and exports and the trade war. It lowered its capital expenditure and construction investment growth estimates for this year from 2.9% to 1.2% and from negative 0.2% to negative 0.5%, respectively. Likewise, its commodity export growth estimate was edged down from 3.6% to 3.5% and current account surplus estimate was adjusted downward by US$5.5 billion to US$65 billion.
In addition, the central bank lowered its inflation estimate for 2019 from 2.0% to 1.9% while maintaining that for this year at 1.6% and its private consumption growth estimate at 2.7% for the third consecutive month. Still, the bank stressed that an increase in private consumption may be somewhat limited by employment conditions, which have room for improvement, and households’ loan repayment burden.