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 left this rate on hold since the start of the year after tightening policy aggressively over 2022 as part of efforts to return headline inflation to their target level of 2.0 percent.

Since the previous BoK meeting mid-October, data have shown a small increase in headline inflation from 3.7 percent in September to 3.8 percent in October and a small decline in core CPI inflation from 3.3 percent to 3.2 percent. In the statement accompanying today's decision, officials note that the recent increase in headline inflation largely reflects higher energy and food prices and reiterated that they expect inflation to trend lower over the medium-term. Nevertheless, they have revised their forecasts, with core inflation now expected to average 3.5 percent in 2023 and 2.3 percent in 2024, up from the previous forecasts of 3.4 percent and 2.1 percent respectively.

The statement also notes again that"domestic economic growth has continued to improve at a modest pace" in response to better export performance. They have retained their forecast for GDP to grow by 1.4 percent in 2023 but have revised their GDP growth forecast for 2024 slightly lower from 2.2 percent to 2.1 percent.

Reflecting their commitment to return inflation to the target level, officials concluded that it remains appropriate to leave policy rates on hold and that their policy stance should remain"restrictive" until they are satisfied that the target will be met. This suggests that, for now, their bias remains in favour of tightening policy rates further rather than a move to unwinding the rate increases delivered in 2022.

The Bank of Korea has kept policy unchanged at its last six meetings. For its October meeting, the bank is expected to hold tight once again.

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.