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| Bank of Korea (BOK) Governor Rhee Chang-yong bangs his gavel during this year's final rate-setting meeting at the central bank's headquarters in downtown Seoul, Thursday. Yonhap |
Central bank hikes key rate for 6th consecutive time to 3.25%
By Yi Whan-woo
The Bank of Korea (BOK) slashed its 2023 growth outlook for Korea to 1.7 percent, Thursday, from its previous projection of 2.1 percent, citing anticipated slowdowns in exports and the pace of recovery in private spending.
The 2023 forecast is alarming for Asia's fourth-largest economy as its growth potential had been estimated to be in the 2 percent range for the past few years.
The BOK kept its growth outlook for 2022 at 2.6 percent, while projecting a 2.3 percent growth for 2024.
Korea's annual growth previously fell short of reaching the 2 percent range only during periods of four crises ― minus 0.7 percent in the pandemic-stricken year of 2020, 0.8 percent in 2009 in the midst of the global financial crisis, minus 5.1 percent in 1998 during the Asian financial crisis and minus 1.6 percent in 1980 in the wake of the second global oil shock.
The central bank's growth projection for next year is in line with estimates by the OECD at 1.8 percent and Fitch Ratings at 1.9 percent.
It is lower than the International Monetary Fund's (IMF) forecast of 2.0 percent and Asian Development Bank's (ADB) 2.3 percent outlook.
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"Korea's economic growth is forecast to remain below its growth potential due to sluggish growth in major economies," the BOK said in a press release, adding that the United States, China and Japan will grow at slower paces, while the eurozone faces a possible near-term recession. "Exports of goods will continue to slow due to weakening global demand," it added, also mentioning that overseas shipments will only rebound in the second half of 2023.
BOK Governor Rhee Chang-yong told the press, "It will be tough for our economy to grow at a fast rate and keep prices low while the entire world is struggling."
For private consumption, the BOK said, "Recovery momentum will slow gradually due to falling real purchasing power and the rise in interest rates," although it is expected that the effects of pent-up demand remain.
Specifically, the possibility of a steep fall in housing prices was cited as one of the major downside risks for private consumption.
Ha Joon-kyung, a Hanyang University economics professor, forecast the growth rate may fall below the 2 percent range next year as predicted by the BOK. "The perked up demand on consumption is mainly driven by the eased pandemic and such demand may diminish over time," Ha said.
Thursday's announcement on economic outlook was preceded by this year's final rate-setting meeting.
The BOK's monetary policy committee raised the policy rate by the conventional margin of a quarter-percentage point, slowing down the pace of its credit tightening to strike a balance between inflation and slowed growth.
Thursday's hike marks the sixth consecutive rate increase since April, including two rare 50-basis-point hikes.
The benchmark seven-day repurchase agreement rate now stands at a more-than-10-year high of 3.25 percent.
"The board judges that the policy response to ensure price stability should be continued as inflation has remained high," the BOK said.
It referred to the inflation outlook that remains above the BOK's target goal of 2 percent although it was revised down, Thursday.
The BOK forecast 2022 consumer prices to grow at 5.1 percent, down from its previous outlook of 5.2 percent, to mark the highest level since 7.5 percent in 1998.
Inflation is anticipated to cool down to 3.6 percent next year and then 2.5 percent in 2024.
The central bank said the size of the rate hike, Thursday, was judged to be appropriate, "in overall consideration of the easing of risks in the foreign exchange sector and the contraction of short-term financial markets, while the economic slowdown is expected to be greater than forecast in August."
It noted the U.S. dollar has weakened and long-term market interest rates have fallen, as risk aversion has partly subsided on the expectations of an adjustment to the pace of the U.S. Federal Reserve's policy rate hikes. The minutes for the Fed's Nov. 1-2 meeting released Wednesday showed the majority of Fed officials stating that it would soon be appropriate to reduce the size of their interest rate hikes.
The BOK still maintained a view on a small incremental increase, amid the widened interest gap between the U.S. and Korea and concerns over a capital outflow in search of save haven assets.
The U.S. rate currently remains in the range of 3.75 percent to 4 percent, and could possibly rise as the Fed has one more rate-setting meeting this year in December.
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