| Consensus | Actual | Previous | |
|---|---|---|---|
| Change | 25bp | 25bp | 25bp |
| Level | 3.50% | 3.50% | 3.25% |
Highlights
The Bank of Korea has increased its main policy rate by 25 basis points to 3.50 percent at its policy meeting held today, in line with the consensus forecast. This takes the cumulative amount of rate increases made since late 2021 to 275 basis points, with the policy rate now at its highest level since 2008.
Since the previous BoK meeting late November, data have shown headline inflation has fallen from 5.7 percent in October to 5.0 percent in both November and December, below the peak of 6.3 percent recorded in July but still well above the BoK's target level of 2.0 percent. Core CPI inflation has been relatively steady but high in recent months.
The statement accompanying today's decision notes that a weaker global outlook and tighter monetary policy are expected to slow domestic growth. Officials now expect GDP growth in 2023 will be below the forecast of 1.7 percent they made in November, though they have not yet updated their forecasts. Officials expect inflation will be 3.6 percent in 2023, as they did in November, but note that uncertainty about the outlook is high, citing the impact of energy price increases and global economic weakness.
At their previous meeting officials concluded that they believe further rate hikes would be"warranted for some time". Today's statement is less definite about the potential for further policy tightening, with officials merely noting that they deem it"warranted to maintain the restrictive policy stance" and that any further rate increases will be based on assessment of"economic downside risks and financial stability risks".
Since the previous BoK meeting late November, data have shown headline inflation has fallen from 5.7 percent in October to 5.0 percent in both November and December, below the peak of 6.3 percent recorded in July but still well above the BoK's target level of 2.0 percent. Core CPI inflation has been relatively steady but high in recent months.
The statement accompanying today's decision notes that a weaker global outlook and tighter monetary policy are expected to slow domestic growth. Officials now expect GDP growth in 2023 will be below the forecast of 1.7 percent they made in November, though they have not yet updated their forecasts. Officials expect inflation will be 3.6 percent in 2023, as they did in November, but note that uncertainty about the outlook is high, citing the impact of energy price increases and global economic weakness.
At their previous meeting officials concluded that they believe further rate hikes would be"warranted for some time". Today's statement is less definite about the potential for further policy tightening, with officials merely noting that they deem it"warranted to maintain the restrictive policy stance" and that any further rate increases will be based on assessment of"economic downside risks and financial stability risks".
Market Consensus Before Announcement
The consensus for January's meeting is a second straight 25-basis-point hike.
Definition
South Korea’s central bank, the Bank of Korea (BoK), announces its monetary policy with regard to interest rates eight times a year. The announcement conveys to the financial markets and investors what, if any, changes in policy might be. The main focus is the target set for the base rate. Policy is framed around keeping the annual rate of inflation as measured by the consumer price index (CPI) at 2 percent over the medium-term.
Description
The Bank of Korea determines interest rate policy at eight meetings during the year. A post-meeting statement is issued after each meeting. The Bank also publishes its Monetary Policy report four times a year and updates economic forecasts twice a year.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The Bank has an inflation target at 2 percent over the medium-term. The inflation control target is set by the Bank of Korea in consultation with the government and is reviewed every two years.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
Monetary policy goals are to aid and abet solid economic growth along with rising living standards. To achieve these goals, inflation is kept low, stable, and predictable. The Bank has an inflation target at 2 percent over the medium-term. The inflation control target is set by the Bank of Korea in consultation with the government and is reviewed every two years.
The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.
