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S. Korea freezes policy rate at 3.5 pct for 8th time

11 January 2024 07:13 (UTC +04:00)

South Korea's central bank on Thursday froze its policy rate for the eighth straight time on the back of lingering economic uncertainties.

Bank of Korea (BOK) Governor Rhee Chang-yong and other monetary policymakers decided to leave the benchmark seven-day repurchase rate unchanged at 3.50 precent.

It was in line with market expectations. According to the Korea Financial Investment Association's poll of 100 fixed-income experts, 98 percent predicted the rate freeze this month.

The BOK had put the rate on hold seven times last year after delivering interest rate hikes by 3.0 percentage points between August 2021 and January 2023.

The successive rate freeze came amid the remaining uncertainties such as the faltering real estate market.

Taeyoung Engineering & Construction applied for a debt workout, or an out-of-court agreement between a borrower in default and creditors to restructure debt, in late December.

The 16th-biggest builder in terms of construction capacity struggled with liquidity shortage, affected by large-scale real estate project financing (PF) loans, or loans secured by future cash flow from real estate development projects.

The debt-restructuring program application boosted concerns about the real estate market that suffered from higher borrowing costs.

Higher borrowing costs increased the debt-servicing burden for households struggling with record-high debts that would negatively influence domestic consumption.

Debts owed by households to deposit-taking banks kept an upward trend for the eighth straight month to reach a new high in November due to solid demand for mortgage loans.

Inflationary pressure remained in recent months. Consumer prices rose 3.2 percent in December from a year earlier, staying above 3 percent for the fifth consecutive month.

The consumer price inflation surpassed the BOK's mid-term inflation target of 2 percent for 33 months in a row.

After peaking at 6.3 percent in July 2022, headline inflation had been on the decline and hit the bottom at 2.4 percent in July last year.

The BOK said that inflation is expected to show a slowing trend as the impact of supply shocks gradually diminishes amid the weak demand-side pressure, but it noted that the pace of this moderation is likely to be moderate.

Export, which accounts for about half of the export-driven economy, increased 5.1 percent in December from a year earlier, continuing to grow for the third successive month.

The export rebound was led by stronger demand for locally-made semiconductors and automobiles.

The BOK said the domestic economy is forecast to continue improving moderately, mainly driven by exports, but it noted that the recovery in private consumption is weaker than anticipated.

The country's finance ministry set this year's economic growth outlook at 2.2 percent. It was higher than 1.4 percent last year but still lower than 2.6 percent in 2022.

Forecast for the consumer price inflation was put at 2.6 percent in 2024, far lower than 3.6 percent in 2023 and 5.1 percent in 2022.

Concerns lingered over a broad gap between the South Korean and the U.S. interest rates.

The U.S. Federal Reserve froze its target range for the federal funds rate at 5.25-5.50 percent for the third consecutive time in December, indicating interest rate cuts this year.

BOK Governor Rhee told a press conference that the need for additional rate hikes got weaker than before, stressing that it would not be easy to cut rates at least for the next six months as rate cuts could boost expectations for higher housing prices.