South Korea's Central Bank Keeps Rates Steady, Trims Growth and Inflation Forecasts

Background

On August 22, 2024, the Bank of Korea (BOK) held its benchmark interest rate unchanged at 1%, but revised its growth and inflation forecasts for the year.

This marks the fourth consecutive time that the BOK has kept rates on hold, following a series of hikes in 2023 to combat rising inflation.

Growth and Inflation Forecasts

The BOK cut its growth forecast for 2024 from 2.1% to 1.8%, citing slowing global demand and a weaker-than-expected recovery in domestic consumption.

It also lowered its inflation forecast from 3.6% to 3.3%, as easing supply chain disruptions and lower energy prices put downward pressure on inflationary pressures.

Key Points:

• BOK held interest rates steady at 1%
• Growth forecast cut to 1.8%
• Inflation forecast lowered to 3.3%

Policy Outlook

Governor Rhee Chang-yong indicated that the BOK will remain data-dependent and continue to monitor inflation and economic growth closely.

He noted that while inflation is moderating, it remains above the BOK's target of 2%, and that the global economic outlook remains uncertain.

Analysts expect the BOK to maintain its accommodative stance in the near term, with further rate hikes likely only if inflation remains stubbornly high.

Market Reaction

The South Korean won weakened slightly against the U.S. dollar following the BOK's decision, as investors priced in the dovish tone of the announcement.

Stocks on the KOSPI index rose modestly, with investors taking comfort in the BOK's commitment to supporting economic growth.

Conclusion

The BOK's decision to keep rates steady and reduce its growth and inflation forecasts reflects the changing economic landscape.

While inflation is moderating, the BOK is concerned about slowing global demand and a weaker recovery in domestic consumption.

The central bank is likely to remain data-dependent in the near term, with further rate hikes unlikely unless inflation persists above target or the economic outlook improves significantly.