The Bank of Korea left its main policy rate unchanged at 3.50 percent at its policy meeting held today, in line with the consensus forecast. Officials have now left this rate on hold for five consecutive meetings after increasing it by a cumulative amount of 275 basis points since late 2021 as part of efforts to return headline inflation to its target level of 2.0 percent.

Since the previous BoK meeting mid-July, data have shown headline inflation fell from 2.7 percent in June to 2.3 percent in July. Core CPI inflation has also moderated in recent months to 3.3 percent in July. In the statement accompanying today's decision, however, officials note that the fall in headline inflation largely reflects base effects from higher oil prices last year. They expect headline inflation to pick up again in coming months and retain their previous forecast for it to average 3.5 percent for the year. They have also revised up their 2023 core inflation forecast slightly from 3.3 percent to 3.4 percent.

The statement also notes that the recent improvement in domestic growth has"somewhat moderated" since the last meeting, but officials remain confident that private consumption and exports will improve in coming months. They continue to forecast that South Korea's economy will grow 1.4 percent in 2023.

Officials note that policy uncertainty remains"high" and concluded that this warrants keeping the policy stance"restrictive" for"a considerable time". They have also again indicated that further policy tightening may yet be required. Incoming inflation data will likely remain the key factor driving policy decisions in coming months.

With both headline and core inflation cooling, to 2.3 and 3.3 percent respectively in July, the Bank of Korea is expected to keep policy unchanged for a fifth straight meeting.

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.

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.