(4th LD) BOK stands pat for 5th time amid slowdown woes

South Korea’s central bank held its key interest rate steady for the fifth straight time Thursday as it weighs a slowdown in growth amid moderating inflation.In a widely expected decision, the monetary policy board of the Bank of Korea (BOK) kept the …

South Korea's central bank held its key interest rate steady for the fifth straight time Thursday as it weighs a slowdown in growth amid moderating inflation.

In a widely expected decision, the monetary policy board of the Bank of Korea (BOK) kept the benchmark seven-day repo rate unchanged at 3.5 percent.

This marked the fifth straight time that the BOK has stood pat following rate freezes in February, April, May and July. The rate freezes came after the BOK delivered seven consecutive rate hikes from April 2022 to January 2023.

The central bank said inflation has slowed, but it will likely pick up again later this year, hovering above its target level for a considerable time.

"In addition, uncertainties regarding economic conditions and monetary policy in major countries have risen. It is also necessary to closely monitor household debt trends. The board, therefore, sees that it is appropriate to maintain its current restrictive policy stance," the bank said in a statement.

"It is appropriate to judge whether an additional rate hike is needed while keeping monetary policy restrictive for a considerable time," BOK Gov. Rhee Chang-yong told reporters.

Mentioning that all the BOK's monetary board members left the door open for a potential rate increase, Rhee said it is uncertain how long the Federal Reserve's tightening mode will continue and the currency market's volatility may increase.

"Also, household debts are increasing consistently, and we should take note of this," he said.

Asia's fourth-largest economy is facing the prospect of slowing down in the face of growing economic risks in China, the country's largest trading partner, and an extended slump in outbound shipments amid easing inflationary pressure.

The central bank maintained its growth outlook for the year at 1.4 percent. In May, the bank cut its growth projection for Asia's fourth-largest economy to 1.4 percent from the 1.6 percent predicted three months earlier.

But the BOK said that uncertainties over growth in the Chinese economy and its domestic impacts, growth in major economies and the timing of a rebound in the IT sector are judged to be high.

Given the growing uncertainties, the central bank cut its growth projection for next year to 2.2 percent from May's 2.3 percent.

South Korea's economy grew at a slightly faster pace of 0.6 percent in the second quarter of this year than three months earlier despite a slump in exports. In the first quarter, the economy expanded 0.3 percent following a 0.3 percent contraction.

Last year, the country's economy grew 2.6 percent, slowing from a 4.1 percent advance in 2021 and marking the slowest pace since 2020, when the economy contracted 0.7 percent amid the fallout from the coronavirus pandemic.

South Korea's exports fell for the 10th consecutive month in July due mainly to weak demand for semiconductors.

Exports have been on a steady decline since October last year amid aggressive monetary tightening by major economies to curb high inflation. It is also the first time since 2020 that exports have declined for nine months in a row.

This year's exports are expected to grow 0.7 percent, slowing from last year's 2.6 percent rise, and private spending is forecast to grow 2 percent, also decelerating from last year's 4.1 percent gain, according to the central bank.

Facility investment for the year is projected to contract 3 percent, compared with last year's 0.9 percent fall, while construction investment is likely to grow 0.7 percent from last year's 2.8 percent decline.

The country's current account surplus is estimated at US$27 billion for the year, smaller than last year's $29.8 billion.

Coming as a relief to the central bank, inflation in Asia's fourth-largest economy is moderating.

The country's consumer price growth slowed for the sixth straight month in July to 2.3 percent, the lowest level in 25 months on the back of lower oil prices.

But the BOK predicts inflationary pressure to build up down the road, with inflation expected to rise again to over 3 percent around the end of the year, far higher than its target rate of 2 percent.

For the full year, the central bank expects inflation to be 3.5 percent, unchanged from its earlier forecast.

The central bank said core inflation is projected to maintain its modest slowdown. "However, it is projected to be 3.4 percent for the year, which is slightly higher than the May forecast of 3.3 percent due to accumulated cost pressure," it said.

Rising household debt is another nagging concern for policymakers here. On the back of eased loan curbs, home prices rebounded in Seoul and other regions.

The central bank's rate freeze also came in the face of the rate difference with the United States widening. Higher rates in the U.S. are feared to prompt money outflows from South Korea, thereby weakening the local currency against the dollar and exerting upward inflation pressure by making imports more expensive.

In July, the U.S. Federal Reserve raised its benchmark lending rate by a quarter percentage point, sending it to the highest level since 2001.

The rise increases the key rate to a range between 5.25 percent and 5.5 percent, while further widening the gap between the key rates of South Korea and the United States to an all-time high of 1.75-2.0 percentage points.

The Fed started its aggressive campaign of rate hikes in March last year to tame inflation.

Source: Yonhap News Agency