The Korea Herald


BOK kicks off 2024 by keeping interest rate steady

Unfazed by looming default from construction loans, central bank confirms commitment to battling inflation

By Im Eun-byel

Published : Jan. 11, 2024 - 16:16

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BOK Governor Rhee Chang-yong speaks at a press conference held at the bank's headquarters in central Seoul, Thursday. (Yonhap) BOK Governor Rhee Chang-yong speaks at a press conference held at the bank's headquarters in central Seoul, Thursday. (Yonhap)

The Bank of Korea maintained the key rate at 3.5 percent for the eighth consecutive session at its first rate-setting meeting of the year on Thursday, confirming its unwavering will to combat inflation.

The monetary policy board of the central bank decided to hold the rate through a unanimous vote, keeping the rate steady for nearly a year since February 2023.

Though potential fallout from project financing loans in the construction industry looms with Taeyoung Engineering & Construction filing for debt restructuring last month, the BOK continued to assert that a rate cut will not be happening shortly.

"The BOK does not respond to the crisis of a specific industry or a company, but only to market instability. The current crisis is not of such level which the central bank has to respond to,” BOK Gov. Rhee Chang-yong said at a press conference Thursday.

Rhee deemed that the builder's liquidity crunch does not present a serious threat to the overall real estate market or construction industry.

“It is not likely that the Taeyoung E&C crisis will trigger systemic risks. The builder held a relatively high balance of project financing loans compared to its equity capital. It is a case that lacked proper risk control, which will be a good example of corporate restructuring,” Rhee assessed.

The BOK continued to stress the need to ease inflation. Korea’s consumer price growth, a major gauge of inflation, stood at 3.2 percent in December, staying in the 3 percent range for five straight months.

"The living expense is 0.7 percentage point higher than the consumer price growth on average. Even if inflation falls to below 3 percent, the public experiences a 4 percent price surge in life," Rhee explained. "The inflation has to further ease."

Though the Korean economy has been showing signs of recovery in recent months with a rebound in exports, Rhee remained cautious, singling out ties with China to be a major variable.

“China is the biggest concern," Rhee said. "It is difficult to assess whether (China's economic recovery) will have an impact on that of Korea's, as the trade structure between the two countries has been changing rapidly, reflecting a shift in the supply chain,” Rhee said.

Rhee ruled out the possibility of a rate cut happening soon, specifically saying the members of the monetary policy board agreed the rate should be maintained at the current level for the next three months.

“I personally -- not speaking on behalf of the monetary policy board -- see it to be difficult for a rate cut to happen in six months or more,” Rhee said.

The market nonetheless remained hopeful, taking note of how the BOK excluded a key phrase, “the need to raise the base rate further,” from its monetary policy decision statement for the first time since January 2023.

"The BOK is likely to start a rate cut from the third quarter, bringing down the base rate to 2.75 percent by the end of this year," analyst Ahn Ye-ha from Kiwoom Securities viewed.

Some viewed a rate cut could happen even earlier.

"The BOK, having wrapped up the rate hike cycle, is to monitor its effects throughout the first quarter," said Kang Seung-won, an analyst from NH Investment & Securities. "We continue to expect the first rate cut action to come in May."

Following the BOK's first rate decision of the year, the market will await the US Fed's Federal Open Market Committee meeting set to be held Jan. 30-31.