BOK holds rate steady, signals further tightening as inflation rises and growth strengthens

The Bank of Korea (BOK) signaled that it would continue tightening monetary policy amid elevated inflation and stronger-than-expected economic growth, the central bank said on Thursday, as its policy board unanimously held the benchmark interest rate at 3 percent.

The decision was widely expected after the rare two consecutive 25-basis-point rate increases in July and August.

“By acting preemptively, we have gained greater flexibility to pursue policies suited to the domestic economy,” BOK Gov. Shin Hyun-song said in a press conference held in central Seoul. “We have also helped sustain household purchasing power by stabilizing the exchange rate and, in particular, containing import prices, while supporting financial stability.”

“In that sense, we have bought ourselves time,” Shin added.

By holding the rate steady, policymakers chose to take more time to assess how households and businesses are responding to previous rate increases. But Shin signaled that further rate increases remain on the table as inflation stays elevated and strong economic growth is expected to extend into next year.

“Looking ahead, growth and inflationary pressures are both stronger than we anticipated in August, so we believe it is necessary to maintain the current restrictive monetary policy stance,” Shin said. “We will continue to respond until we are confident that inflation is on a stable path toward our target.”

The BOK expects core inflation next year to exceed its August forecast of 2.5 percent, before moving closer to its 2 percent target around 2028. It also expects economic growth this year and next to be “significantly higher” than its August projections of 3.3 percent and 2.9 percent, respectively, citing strong semiconductor exports and expanding non-IT exports.

Exports are projected to reach $1 trillion this year, while the current account surplus is expected to top the bank’s August forecast of $450 billion.

Despite stronger growth and an improved export outlook, Shin cautioned that government measures to shield consumers from rising energy costs could create longer-term risks.

Shin said the government-imposed cap on oil prices has helped contain consumer prices, but keeping it in place too long could undermine efforts to curb consumption and strain public finances.

“The International Monetary Fund has repeatedly advised that energy price subsidies should not be maintained for too long. The government is well aware of this and likely has a clear exit strategy in mind,” Shin said.

The central banker also noted that the won’s recent appreciation has helped curb import prices, supporting domestic consumption. “Falling import prices have significantly boosted purchasing power, particularly among low-income households,” Shin said.

He explained that a 10 percent appreciation in the won boosts the purchasing power of households in the lowest income quintile — the most vulnerable households — by more than 0.4 percent. The effect is much greater than for households in the top income quintile, helping reduce economic inequality, Shin added.

Despite the won’s recent appreciation to 1,324.2 per dollar as of 3:30 p.m. on Thursday, up from the mid-1,500s in June, the currency still has room to strengthen, Shin said in unusually direct remarks about its valuation.

“Whether measured against the U.S. dollar or the real effective exchange rate, the won remains weaker than it was in previous years,” Shin said.

The real effective exchange rate measures a currency against a basket of major trading partners’ currencies, weighted by trade and adjusted for differences in inflation. The average index level is around 101, but the won’s index stood at about 89 at the end of August, Shin said.

Analysts have widely viewed Shin’s latest remarks as hawkish.

The October monetary policy meeting was likewise hawkish, as the BOK reiterated its emphasis on inflation, economic growth, financial stability and the exchange rate — factors it had cited to justify previous rate increases, according to Kong Dong-rak, a fixed income strategist at Daishin Securities.

“The next rate hike is expected in November, with the current tightening cycle expected to continue through the first quarter of next year,” Kong added, maintaining his forecast for a terminal rate of 3.5 percent.

Kim Ji-man, a senior analyst at Samsung Securities, also viewed Shin’s Thursday remarks as hawkish, pointing to his call to maintain a restrictive monetary policy stance and his assessment that inflationary pressures were stronger than anticipated at the August meeting. While the brokerage saw a dovish element in his comment that inflation was not expected to return to the BOK’s target as early as next year, it maintained its forecast for a terminal rate of 3.75 percent.

BY JIN MIN-JI [[email protected]]