The Bank of Korea has decided to maintain the key interest rate at 3.00% for October. This decision follows two consecutive rate hikes in July and August, indicating a need to assess the impact of these policy changes. However, with inflationary pressures still present and stronger-than-expected economic growth, there is speculation about a potential rate increase at the final meeting of the year in November.
On October 22, the Bank of Korea's Monetary Policy Committee convened to determine the direction of monetary policy and opted to keep the key interest rate at the current level of 3.00%.
The decision to hold the rate steady reflects the committee's judgment that it is necessary to observe the effects of the previous two rate increases. The Bank raised the key interest rate from 2.50% to 2.75% in July and implemented another 0.25 percentage point increase in August.
At that time, the committee anticipated that ongoing conflicts in the Middle East, coupled with stronger-than-expected economic growth, would elevate demand-side inflation pressures, prompting preemptive rate hikes. Following the two consecutive increases, Bank of Korea Governor Shin Hyun-song likened the situation to "using a hoe to prevent a flood."
Recently, the won-dollar exchange rate has fallen to around 1,320 won, easing some of the burdens associated with rising import prices, which likely influenced the decision to maintain the current rate.
Nonetheless, inflation remains elevated, leaving the door open for further rate hikes. The consumer price inflation rate rose from 2.6% in April to 3.1% in May and 3.2% in June, before recording 2.8% in July, 3.1% in August, and 2.9% in September.
The Bank assessed that the inflation rate had somewhat increased, considering the temporary base effect from August had dissipated. It is expected that the consumer price inflation rate will continue to hover around 3% this month.
Strong growth in semiconductor exports could also heighten demand-side inflation pressures. The prolonged conflict in the Middle East adds to supply-side inflation pressures, suggesting that achieving price stability may take considerable time.
Governor Shin has reiterated that the Bank will respond until inflation converges to the target level of 2.0%.
Economic growth forecasts are also being revised upward. In August, the Bank of Korea significantly raised its growth forecast for this year from 2.6% to 3.3%. With robust exports, particularly in semiconductors, there is potential for further upward revisions in the growth forecast during the economic outlook meeting in November.
Financial stability considerations also support the case for additional rate hikes. Despite government measures on real estate, housing prices, particularly for mid- to low-priced homes in the metropolitan area, continue to rise sharply. Although household loans from commercial banks decreased last month, they have resumed an upward trend this month, maintaining concerns about financial imbalances.
The preliminary report on third-quarter GDP growth, set to be released on October 27, along with the October inflation figures due on November 2, are expected to influence future monetary policy decisions. The last monetary policy meeting of the year will take place on November 26.
* This article has been translated by AI.
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