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Korea's Economic Conditions Hindering BOK's Benchmark Rate Adjustment
Rate Hike Postponed Once Again?
Korea's Economic Conditions Hindering BOK's Benchmark Rate Adjustment
  • By Jung Suk-yee
  • October 31, 2018, 09:38
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Bank of Korea Governor Lee Ju-yeol (center) answers questions from lawmakers during a parliamentary audit of the bank on Oct. 29.

The Bank of Korea appears to be planning to raise the key interest rate next month. However, the recent stock market crash and poor economic indices are putting pressure on it not to.

At a parliamentary audit on Oct. 22, Bank of Korea Governor Lee Ju-yeol said he is positive about key rate adjustment in November. On Oct. 29, however, he said that his decision will be based on various factors, including mounting downward pressures on the economy.

The central bank has sent key rate increase signals only when doing so imposes no burden on macroeconomic indices. Still, local economic indices are continuing to deteriorate at this moment. For example, the Korea Composite Stock Price Index (KOSPI) closed at 1,996.05 on Oct. 29, dipping below 2,000 for the first time in 22 months. The index fell 14.81% this month alone, the steepest monthly drop since October 2008.

If this situation goes on, a benchmark rate increase may have to be postponed. Back in August 2011, when the KOSPI dropped 11.86%, the central bank froze the rate in the wake of the sudden stock market crash in spite of favorable economic conditions and a relatively high inflation rate. In October 2008, the bank lowered the rate by no less than one percentage point in a single month. The upcoming Monetary Policy Committee meeting for benchmark rate determination is scheduled for Nov. 30.

In the meantime, economic indices are getting worse. In the Korea Economic Research Institute’s latest business survey index (BSI) covering the 600 largest companies in terms of sales, their outlook for November stood at 90.4 with this year’s steepest month-on-month decline. That for the previous month was 97.3. The lower the BSI is, the more pessimistic economic forecasts are. Besides, the central bank announced on Oct. 25 that South Korea’s quarter-on-quarter GDP growth stood at 0.6% in the third quarter.