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The Bank of Korea, ‘Freezing’ the Base Rate for the Fourth Consecutive Time... The Korea-US Interest Rate Differential is a ‘Dilemma’.

NSP NEWS AGENCY, By Soon-ki Lee and Soo-in Kang, 2023-07-14 08:43 ENX7
#BOK #BaseRate #Freezing

(Seoul=NSP NEWS AGENCY) = On the 13th, the BOK’s Monetary Policy Committee(hereinafter referred to as the Monetary Policy Committee) decided to ‘freeze’ the base rate. This is the fourth consecutive freeze this year. Accordingly, the base rate will remain at 3.50% until the next decision.

Last month, household loans increased by a record high in 1 year and 9 months, mainly on mortgage loans, but the BOK froze the base rate, putting priority on economic recovery.

In fact, on the 4th, the Ministry of Strategy and Finance lowered this year’s gross domestic product(GDP) growth rate by 0.2%p from 1.6% at the end of last year to 1.4%. Exports and domestic demand are sluggish, with semiconductor exports declining by 35.6%. In addition to this, the recent financial instability that erupted at the Korea Federation of Community Credit Cooperatives(KFCC) seems to have helped the decision to freeze the base rate.


However, with consumer price inflation at 2.7% in June, still below the BOK’s 2% target, and the BOK expecting inflation to rise again to around 3% by the end of the year, it is difficult to start cutting rates.

The widening interest rate differential between Korea and the U.S. also makes it difficult to lower rates. Jerome Powell, U.S. Federal Reserve Chairman, has signaled two rate hikes this year. If the FOMC raises the interest rate by 0.25%p in July, the interest rate gap between Korea(3.5%) and the US(5.25-5.5%) will widen to 2%, the largest ever. If this happens, there is a high possibility that the outflow of foreign investment will cause great confusion in the foreign exchange market.

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