Bank of Korea holds rate steady at 3.5 percent

Bank of Korea Gov. Rhee Chang-yong at the Monetary Policy Board meeting held at the bank’s office in central Seoul on Thursday. [JOINT PRESS]

The Bank of Korea kept its policy rate unchanged Thursday for the fourth consecutive time, holding it at 3.5 percent.

It was a widely expected move amid slowing inflation and uncertainties recently caused by a credit union over liquidity risks.

Ninety-three percent of the survey respondents projected the central bank's Monetary Policy Board would keep the rate steady, according to a survey conducted by the Korea Financial Investment Association. The remaining 7 percent expected a rate increase of 0.25 percentage points, up from 11 percent in the previous survey in May.

The latest survey of 100 people covering bonds, including analysts and brokers, was conducted from June 30 through July 5.

Korea's consumer inflation hit a 21-month low to grow 2.7 percent in June from a year earlier, helped by a plunge in the prices of fuel products and the slowing growth rate of the service sector. It was the first time that the on-year growth in consumer prices fell below 3 percent since September 2021.

Uncertainties in the financial sector currently play a bigger role than inflation in the Monetary Policy Board's rate decision, according to Hyundai Motor Securities analyst Oh Chang-sup.

"The recent incident at the Korea Community Credit Cooperatives (KFCC) following the liquidity crunch last year, on top of growing uncertainties caused by the hiked interest rate, is making it difficult for the Monetary Policy Board to raise the policy rate," Oh said.

KFCC was hit by customer withdrawals earlier this month after the media reported a rise in non-performing loans related to its real estate projects. Customers lined up to withdraw deposits, forcing financial regulators to intervene and request that banks inject some 6 trillion won worth of liquidity into the credit union.

Inflation concerns have waned, despite the recent rises in public utility fees, due to falling prices of raw materials and crude oil, Oh said.

"Inflation is expected to fall below 2 percent next year as momentum continues to weaken from a fall in overall prices, including for raw materials and marine transportation, causing deflation."

Despite the rate gap with the U.S. Federal Reserve, foreign investors' holding of bonds in won hit a record high of 244.2 trillion won on July 7.

"Although an additional rate gap between Korea and the United States is expected, capital outflow and currency exchange rate remain favorable," Oh said.

The policy rate difference between Korea and the United States is at an all-time high of 1.75 percentage points.

Federal Open Market Committee (FOMC) members unanimously kept the rate steady at a target range of 5 and 5.25 percent at the Fed's June meeting. But the central bank sees more rate increases ahead, according to the minutes from the June meeting released on July 5.

The next two-day FOMC meeting is scheduled to start on July 25.

The CME FedWatch Tool, which forecasts rates using Fed Fund futures contract prices, put a rate increase ranging between 5.25 and 5.5 percent at more than 90 percent Wednesday.

BY JIN MIN-JI [jin.minji@joongang.co.kr]