On the 10th, the benchmark interest rate was kept unchanged at 2.5% a year at the last regular meeting of the Monetary Policy Board presided over by Bank of Korea Governor Rhee Chang-yong during his term. It was the seventh straight hold following July, Aug., Oct., and Nov. last year and Jan. and Feb. this year. The decision was unanimous by all seven members of the board, including Governor Rhee.
In its statement on the direction of currency policy, the Monetary Policy Board said, "With the Middle East war simultaneously increasing upward pressure on prices and downward pressure on growth, and with volatility in the financial and foreign exchange markets having expanded significantly," it is "appropriate to maintain the current level of the base rate and further assess the developments and spillover effects of the situation, given the high uncertainty related to the Middle East going forward."
◇ Hold amid unstable international oil prices and won-dollar exchange rate
The Monetary Policy Board focused on surging international oil prices and the won-dollar exchange rate. West Texas Intermediate (WTI) rose from $65 per Barrel on Feb. 26, just before the war, to $111 on the 2nd of this month, and has been fluctuating in the $90 range since the two countries agreed to a cease-fire. The won-dollar exchange rate also fell to 1,419 won at the end of Feb. and then jumped to 1,530.1 won on the 31st of last month, marking a record high since the global financial crisis. Since the cease-fire, it has been moving in the high 1,470-won range.
High oil prices and a weak won are factors that push up consumer prices through higher import prices. According to the Ministry of Data and Statistics (MODS), the consumer price inflation rate in March was 2.2%, up from 2% in Jan.–Feb. In particular, petroleum product prices rose 9.9% from a year earlier last month, the largest increase in 3 years and 5 months. The Bank of Korea (BOK) noted at a price situation review meeting on the 2nd that "the pace of consumer price increases will accelerate from April."
In this situation, cutting the base rate could push prices up further. The wider rate gap with the United States would prompt foreign investment funds to move to the United States in pursuit of higher returns. That would deepen the won's weakness. The current U.S. base rate is 3.5%–3.75% a year, and based on the upper end, the rate gap with Korea is 1.25 percentage points (p).
Raising rates to stabilize prices is also not easy for now, as Middle East instability is heightening concerns about an economic slowdown. In Feb., the Bank of Korea (BOK) projected Korea's gross domestic product (GDP) growth this year at 2%, but a downgrade has been suggested since the war. The Monetary Policy Board also noted in its statement that "despite strong semiconductor exports and a supplementary budget, the growth pace has slowed more than initially expected due to rising energy prices and supply disruptions, and this year's growth rate is expected to fall below the February projection."
◇ Governor nominee Shin Hyun-song says "rates will be decided based on how the Middle East situation unfolds"
The future path of the base rate is expected to be clarified under the next governor. Governor Rhee Chang-yong's term ends on the 20th, and his successor, nominee Shin Hyun-song, will take office on the 21st after a confirmation hearing. Arriving for work at the confirmation hearing office in Jung District, Seoul, on the 31st of last month, Shin said, "Because it is uncertain how the Middle East situation will unfold and how long it will last, we need to watch for a bit," adding, "It is desirable to respond flexibly depending on the situation."
Park Sang-hyun, a researcher at iM Securities, said, "While high oil prices are raising concerns about inflation, they are also increasing the risk of an economic slowdown," and predicted, "The Bank of Korea (BOK) will keep rates on hold through the end of the year, including at this Monetary Policy Board meeting." Ahn Ye-ha, a researcher at Kiwoom Securities, also said, "Considering weak domestic demand, it will be difficult to raise rates."