The Bank of Korea (BOK) announced its decision to maintain the benchmark interest rate at 3.5% during a Monetary Policy Board Meeting on Thursday, in response to escalating economic risk from Middle East unrest. This decision, announced by BOK Governor Rhee Chang-Yong in association with the Joint Press Corps, aligns with market expectations and marks the sixth consecutive round of maintaining the seven-day repurchase rate at this level.
Governor Rhee hinted at potential upward adjustments to the inflation forecast in November due to oil price volatility. Despite a cooling economy, Middle East tensions, and rising inflation, the policy board's unanimous decision allows for future rate hikes as a measure to control inflation.
South Korea is currently grappling with an inflation resurgence, as consumer price growth jumped to 3.7 percent in September from a previous range of 2 percent. Analysts have noted that headline inflation has increased due to fluctuating oil prices, while core inflation is on a decline.
The South Korean economy heavily relies on energy imports and faces threats from global oil price fluctuations. The continuous rise in household debt, which has been on an upward trajectory for six straight months and now stands at 1,079.8 trillion won ($800 billion), further compounds these economic uncertainties.
In terms of economic performance, South Korea has seen year-over-year export shrinkage for twelve straight months. The BOK forecasts a GDP growth of 1.4% for 2023, following a 2.6% expansion in 2022. The expected average inflation this year is 3.5%, which is above its 2% target but below last year's figure of 5.1%.
The bank acknowledges increased inflation risks due to global oil prices and the Israel-Hamas conflict, which could potentially delay consumer price inflation's convergence on the target level. A survey conducted by the Wall Street Journal revealed analysts' expectations for policy rate stability until the end of 2023, with potential cuts in 2024 to stimulate growth and mitigate household financial stress.
The BOK and the US Federal Open Market Committee have scheduled their final meetings for November 30 and December 12-13 respectively.
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