Bank Of Korea Keeps Interest Rate At 15-Year High

The Bank of Korea left its benchmark interest rate unchanged on Thursday but it signaled a reduction in the near term as inflation continued its downward trend and the recovery in domestic economy remains weak.

The Monetary Policy Board headed by Rhee Chang Yong unanimously decided to hold the Base Rate at a 15-year high of 3.50 percent.

This was the thirteenth consecutive hold and the outcome of the meeting came in line with expectations.

Suggesting that a rate cut is now closer, the bank said it will maintain a restrictive policy stance but dropped the phrase "for a sufficient period of time" from the previous statement.

However, the bank cautioned that risks related to real estate project financing. Housing prices in Seoul and its surrounding areas increased at a faster pace as transactions volumes increased, while the downward trend in the remaining part of the country continued.

Household loans retained its growth at a high level driven by housing-related loans. With policymakers now more confident about achieving their inflation target and domestic demand set to remain weak, the BoK will start to cut rates in October and that the easing cycle will be larger than most expect, Capital Economics' economist Shivaan Tandon said.

ING economist said Min Joo Kang said the rate cut could come in either October or November. As the focus has shifted to financial market stability and growth, the bank will watch the US Federal Reserve's rate decision in September and market's reaction to it before making any decision, the economist noted.

The central bank today downgraded its economic growth outlook for 2024 to 2.4 percent from 2.5 percent, while the projection for 2025 was retained at 2.1 percent.

The future growth will be influenced by the recovery in consumption, the expansion of the IT sector and also economic conditions in major economies, the central bank noted.

Further, the bank forecast inflation to continue its slowing trend, owing to the base effect from the sharp increases in global oil and agricultural product prices last year and due to moderate demand pressures, the bank observed.

Inflation is projected to be 2.5 percent this year, which was revised down from 2.6 percent estimated in May. For the next year, the bank said inflation will align with the previous forecast of 2.1 percent.

Core inflation is expected to be 2.2 percent in 2024 and 2.0 percent in 2025, consistent with the May forecast.