SEOUL, South Korea's central bank held its key interest rate steady for the sixth straight time Thursday amid a slowdown in growth and heightened uncertainties, such as the prolonged Ukraine-Russia war and rising household debts.
In a widely expected decision, the monetary policy board of the Bank of Korea (BOK) kept the benchmark seven-day repo rate unchanged at 3.5 percent.
This marked the sixth straight time that the BOK has stood pat following rate freezes in February, April, May, July and August. The rate freezes came after the BOK delivered seven consecutive rate hikes from April 2022 to January 2023.
The central bank said although inflation is projected to continue its trend of a slowdown, uncertainties over inflation and growth have risen significantly in the wake of restrictive monetary policy stances in major countries and heightened geopolitical risks.
"In addition, it is forecast that the pace of inflation slowdown will moderate more than previously expected, and it is necessary to monitor household debt growth. The board, therefore, sees that it is appropriate to maintain its current restrictive policy stance," the BOK said in a statement.
Asia's fourth-largest economy is facing the prospect of slowing down in the face of growing economic risks in China, the country's largest trading partner, and an extended slump in outbound shipments amid easing inflationary pressure.
Adding to the woes are the drawn-out Ukraine-Russia conflict and rising household debts. Recently, the escalating war between Israel and Hamas has emerged as another key risk factor for the South Korean economy as oil prices could stay higher for longer.
In May, the bank cut its growth projection for Asia's fourth-largest economy to 1.4 percent from the 1.6 percent predicted three months earlier.
South Korea's economy grew at a slightly faster pace of 0.6 percent in the second quarter of this year than three months earlier despite a slump in exports. In the first quarter, the economy expanded 0.3 percent following a 0.3 percent contraction.
Last year, the country's economy grew 2.6 percent, slowing from a 4.1 percent advance in 2021 and marking the slowest pace since 2020, when the economy contracted 0.7 percent amid the fallout from the coronavirus pandemic.
South Korea's exports fell for the 12th consecutive month in September but logged the smallest on-year decline so far this year, as global demand for semiconductors has been on the recovery track.
Exports have been on a steady decline since October last year amid aggressive monetary tightening by major economies to curb high inflation. It is also the first time since 2020 that exports have declined for nine months in a row.
This year's exports are expected to increase 0.7 percent, slowing from last year's 2.6 percent rise, and private spending is forecast to grow 2 percent, also decelerating from last year's 4.1 percent gain, according to the central bank.
"Domestic economic growth has continued to improve at a modest pace owing to the easing of sluggishness in exports, although the recovery in private consumption has been somewhat slow ... Going forward, domestic economic growth is expected to improve gradually with the easing of the sluggishness in exports," the bank said.
Coming as a relief to the central bank, inflation in Asia's fourth-largest economy is moderating, although its pace gathered ground last month due to higher oil prices.
Consumer prices increased 3.7 percent last month from a year earlier, the fastest in five months, driven by higher oil costs and rising prices of some farm goods.
The BOK predicts inflationary pressure to build up down the road, with inflation expected to stay over 3 percent around the end of the year, far higher than its target rate of 2 percent.
For the full year, the central bank expects inflation to be 3.5 percent.
BOK Gov. Rhee Chang-yong said it is difficult to predict how the Israel-Hamas conflict will unfold and subsequently it is hard to predict how inflation here will be affected.
The BOK said a slowdown in inflation is expected to be more moderate than previously expected due to upside risks, such as rising oil prices, exchange rates and the Israel-Hamas conflict.
The rate freeze also came as rising household debt is another nagging concern for policymakers here. On the back of eased loan curbs, home prices rebounded in Seoul and other regions.
Household loans extended by banks in South Korea rose for the sixth straight month, led by rising home-backed loans.
As for household debts, the BOK chief said it needs to take microeconomic measures first to rein in soaring debt, and then interest rate adjustment could be reviewed.
The central bank's rate freeze also came in the face of the rate difference with the United States widening.
Higher rates in the U.S. are feared to prompt money outflows from South Korea, thereby weakening the local currency against the dollar and exerting upward inflation pressure by making imports more expensive.
In September, the U.S. Federal Reserve froze its benchmark lending rate at a range of 5.25 percent to 5.5 percent, the highest level since 2001, putting the gap between the key rates of South Korea and the United States at an all-time high of 1.75-2.0 percentage points.
The Fed started its aggressive campaign of rate hikes in March last year to tame inflation.
Source: Yonhap News Agency