The Bank of Korea held its first regular meeting of the year of the the Bank of Korea's monetary policy committee on the 15th and kept the base rate unchanged at 2.5% per year. It is the fifth consecutive time the rate has been maintained at the same level, following July, August, October and November last year. Earlier, a survey by ChosunBiz of 11 domestic securities macro and bond experts found all of them expected the rate to be kept on hold.
Bank of Korea (BOK) said in a briefing sent to the press corps that "as inflation is expected to gradually stabilize, growth is continuing to improve, and risks from the financial stability side are also continuing," adding, "it is appropriate to maintain the current base rate level while assessing policy conditions at home and abroad."
Bank of Korea (BOK) said, "Going forward, monetary policy will support the recovery of growth, while closely examining changes in policy conditions at home and abroad and the resulting inflation trends and financial stability conditions in the process before making decisions."
◇ Concern over a rising exchange rate has grown… rising home prices also hinder rate cuts
Bank of Korea (BOK) cited the recent rise of the won-dollar exchange rate to the mid-to-high 1,400-won range as a reason for keeping rates on hold. The won-dollar rate steadily climbed from the 1,370-won range in mid-September last year to near 1,485 won in mid-December. It fell to the 1,420-won range after foreign exchange authorities conducted strong verbal intervention, but has recently risen again to the 1,470-won range.
If Bank of Korea (BOK) cuts rates, the rate gap with the United States, where the current benchmark is 3.5% to 3.75%, will widen further. If that happens, foreign investment funds could flow into the U.S., increasing demand to convert won to dollars and potentially accelerating won weakness.
A higher exchange rate can spur import prices and affect consumer prices. The consumer price inflation rate fell from 2.4% in November last year to 2.3% last month but still exceeds Bank of Korea (BOK)'s 2% inflation target. As a result, expected inflation one year ahead came in at 2.6% last month.
The continued rise in housing prices is also a factor holding back a rate cut. If Bank of Korea (BOK) lowers rates, it could spur real estate investment demand and increase household liabilities further. If household liabilities grow, private consumption could contract and arrears among vulnerable groups could rise, negatively affecting the real economy and the overall financial system.
According to the Korea Real Estate Board (REB), in the first week of January this year (as of the 5th), the average sale price of apartments in Seoul rose 0.18% from the previous week, marking 48 straight weeks of increases since the first week of February last year. Although the government rolled out real estate measures on June 27, Sept. 7, and Oct. 15 last year, dwelling prices continue to rise.