On February 23, local time, the Bank of Korea decided to keep the benchmark interest rate unchanged at 3.5%. The Bank of Korea’s decision to stand still coincides with market expectations and reflects increasing adverse factors in the Korean economy, including falling exports, weak industrial production, and declining housing prices.
According to reports, the Bank of Korea said that it is necessary to take time to evaluate the impact of interest rate hikes on the economy and to consider various factors such as economic growth and financial market conditions to determine future monetary policy directions. After the interest rate decision was announced, the yield on three-year bonds in Korea fell 6 basis points to 3.6%, and the US dollar fell 0.1% against the won to 1305.2.
Analysts said that consumer spending in Korea has been slowing since last autumn, and exports have also begun to decline. The sharp drop in global semiconductor demand has also led manufacturers in Korea to reduce production. The depreciation of the won has pushed up the cost of imported food and energy, and the weak performance of the won is seen as an important driving factor for the Bank of Korea’s decision to raise interest rates sharply in the fall of last year.
According to Korean media reports, the Korea Customs Service statistics show that from February 1 to 20 this year, Korea’s exports decreased 2.3% to US$33.549 billion, imports increased 9.3% to US$39.536 billion, and the trade deficit reached US$5.987 billion, 3.27 times the US$1.833 billion in the same period last year. The reasons for the widening deficit are: first, the sharp increase in energy imports, and second, the continuous decline in exports. Due to the decline in the price of stored chips, semiconductor exports fell 44% year-on-year, the second consecutive month of decline since January this year.
In August 2021, the Bank of Korea raised the benchmark interest rate from 0.5% to 0.75%, ending 15 months of historically low benchmark interest rate easing monetary policy, and then to 1% in November of the same year. In January, April, May, July, August, October and November of last year, the Bank of Korea raised interest rates consecutively, raising the rate to 3.25%. In January of this year, the Bank of Korea raised the benchmark interest rate by 25 basis points to 3.5%.
At the same time, the Bank of Korea released an updated Economic Outlook Report on the 23rd, which lowered its real GDP growth forecast for 2023 from 1.7% to 1.6%, and its consumer price index (CPI) inflation forecast from 3.6% to 3.5%.
The report said that the Korean economy recorded a negative growth for the first time in two and a half years in the fourth quarter of last year, and the economic slowdown is evident, and prices are not yet stable, so the central bank has lowered its economic growth forecast for the third time in three months. This expectation is the same as that of the Korean government, lower than the expectations of the OECD at 1.8% and the IMF at 1.7%, but higher than the expectations of the Asian Development Bank at 1.5% and the average expectations of nine major overseas investment banks at 1.1%.