The Bank of Korea held its last regular meeting of the year of the the Bank of Korea's monetary policy committee on the 27th and kept the base rate unchanged at 2.5% per year. Following July, August, and October, it kept the rate at the same level for the fourth consecutive time. Earlier, a survey by ChosunBiz of 11 domestic securities macro and bond experts found that all of them expected the rate to be kept on hold.
Bank of Korea (BOK) said in a briefing document sent to the press corps that "while the inflation rate has risen somewhat, growth remains uncertain in the outlook, but improvement continues mainly in consumption and exports." It added, "Given that risks on the financial stability front are also persisting, we judged it appropriate to maintain the current base rate level while reviewing domestic and external policy conditions."
Bank of Korea (BOK) also said, "For future currency policy, we will keep the door open to a rate cut, and in the process, closely review changes in domestic and external policy conditions and the resulting growth and price trends, as well as the financial stability situation, and decide whether and when to further cut the base rate."
◇ Concerns about inflation have grown... Rising exchange rate and home prices also make rate cuts difficult
Bank of Korea (BOK) said in the "currency policy direction" released after the Monetary Policy Board meeting that the recent inflation rate has risen somewhat. In the currency policy direction released after the board meeting last month, Bank of Korea (BOK) said "prices are maintaining a stable trend," but this month it said "the inflation rate is somewhat higher than expected." It then revised this year's consumer price inflation outlook up to 2.1% from 2.0%.
This becomes a factor that makes it difficult to cut the base rate for the time being. When rates go down, it has the effect of releasing more money into the market, which can instead fuel inflation.
Bank of Korea (BOK) pointed to the rise in the won-dollar exchange rate and a recovery in domestic demand as causes of inflation. The won-dollar exchange rate steadily climbed from the 1,300-won range in mid-September and recently topped 1,470 won. After Koo Yun-cheol, Deputy Prime Minister and Minister of the Ministry of Economy and Finance, verbally intervened on the 14th and then held a press briefing on the 26th hinting at mobilizing the National Pension Service, it fell slightly but rose again on the day.
The rise in the exchange rate also makes it difficult for Bank of Korea (BOK) to cut rates. If Bank of Korea (BOK) lowers rates, the rate gap with the United States, where the current base rate is 3.75%–4.00%, will widen. If that happens, capital outflows by foreign investors to U.S. markets could accelerate. In that case, demand to convert won into dollars would increase, potentially speeding the won's depreciation.
The recent continued rise in home prices also appears to be something Bank of Korea (BOK) considered in its rate decision. If Bank of Korea (BOK) lowers rates, household loan burdens would ease, potentially boosting demand for real estate investment. According to KB Real Estate, apartment sale prices in Seoul in November rose 1.72% from the previous month. It was the biggest increase in 5 years and 2 months since September 2020 (2%). The government has announced real estate measures on June 27, Sept. 7, and Oct. 15, but home prices have not stabilized. Household liabilities increased by 2.46 trillion won in the second quarter and by 1.49 trillion won in the third quarter.