"Assessing Effects of Preemptive Hikes": BOK Holds Benchmark Rate at 3.00% (Updated)

Assessing the effects of July and August hikes... checking the impact on vulnerable borrowers
Market expects "tightening stance to continue... next hike in November"
Strong growth, with forecasts for this year's growth reaching as high as 4.0%, plus

The Bank of Korea's Monetary Policy Board held the benchmark interest rate at 3.00% on the 22nd. The central bank plans to maintain its monetary tightening stance while adjusting the pace and assessing the effects of consecutive rate hikes in July and August.

Bank of Korea Governor Shin Hyun-song strikes the gavel during a meeting of the Monetary Policy Board to decide the direction of monetary policy at the Bank of Korea in central Seoul on the 22nd.

The BOK's Monetary Policy Board said it had kept the benchmark rate at 3.00% at a meeting to decide the direction of monetary policy, held that day at the BOK's headquarters in Jung-gu, Seoul. The decision was in line with market expectations. In an earlier survey by The Asia Business Daily of economic experts at domestic and foreign economic research institutes, securities firms and banks, 12 of 13 respondents (92.3%) had also expected the rate to remain at 3.00% this month.

The decision to hold rates this month was intended to allow the economy to catch its breath. The consecutive hikes in July and August were preemptive steps to address risks early rather than let them grow into bigger problems. This month's pause in monetary tightening gave the central bank time to assess the effects on vulnerable borrowers, among other things. The recent decline in the won-dollar exchange rate to around 1,320 won has also been seen as weakening the case for a rate hike this month. The exchange rate has recently been relatively stable. The won-dollar rate fell to as low as 1,322.8 won during trading the previous day. Based on its intraday low, that was the lowest level since October 2, 2024, when it stood at 1,317.1 won.

However, the rate-hiking cycle is continuing. Experts pointed to November as the time when another “hoe”—a preemptive rate hike—may be needed. They cited strong growth driven by the impact of semiconductor exports and upward pressure on prices. The narrowing of the domestic-foreign interest rate differential resulting from a U.S. rate hike is also a factor to consider, they said. The gap between South Korea and the United States, where the upper end of the policy rate range is 4.00%, currently stands at 1.00 percentage point.

The current account posted a cumulative surplus of $279.2 billion from January to August this year, nearly four times the $69.67 billion recorded over the same period last year. Lee Hyeong-il, Deputy Prime Minister and Minister of Finance and Economy, recently said at a press briefing that this year's real gross domestic product (GDP) growth could reach as high as 3.6%. In the earlier survey by The Asia Business Daily, 8 of 11 respondents forecast South Korea's economic growth this year at 3.5% to 4.0%, higher than the BOK's August forecast of 3.3%. Experts believe the BOK will also raise its growth forecast in its revised economic outlook next month.

Concerns over inflation also remain acute. There are growing concerns about the impact of persistently high international oil prices amid the prolonged war in the Middle East, as well as demand-side inflationary pressure arising from improved income conditions driven by the semiconductor industry. Brent crude approached $112 a barrel during trading on October 20 (local time) on the London-based ICE Futures Exchange, reaching its highest level in five months. Nominal GDP in the second quarter jumped 26.4% year over year, the highest growth rate in 47 years, since the third quarter of 1979, when it rose 27.7%. At a meeting to review inflation conditions on October 2, the BOK said, “Consumer prices are likely to continue rising sharply, particularly core inflation, due to the pass-through of cost shocks and expanding demand-side pressures.”

From a financial stability perspective, concerns are mounting over expectations of rising home prices and the increase in household loans. According to the Korea Real Estate Board, apartment prices in Seoul have risen for 88 consecutive weeks, from the first week of February last year through the second week of this month. Prices have started falling in Seoul's three Gangnam-area districts—Gangnam, Seocho and Songpa—but increases appear to be gaining momentum in the city's outer areas and southern Gyeonggi Province. Household lending, which slowed last month, is rising again this month. The outstanding household loans of the five major banks—KB Kookmin, Shinhan, Hana, Woori and NH NongHyup—stood at KRW 783.5983 trillion as of the 15th, up KRW 2.7643 trillion from the end of last month.

Experts generally expect the terminal rate to reach 3.50%, after two further hikes of 0.25 percentage point (25 basis points) each from the current level. Some have not ruled out the possibility of raising the rate to 4.00%. Cho Yonggu, a researcher at Shinyoung Securities, said, “Considering robust growth, the BOK's concerns about demand-side inflation, its preference for preemptive financial stability measures, and the possibility of a higher neutral rate, the central bank will likely emphasize that it should continue monetary tightening with another hike in November while providing targeted support to vulnerable sectors through fiscal policy.”

This content was produced with the assistance of AI translation services.