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The Bank of Korea on Thursday kept its policy rate unchanged at 3.5 percent, holding it for the fifth consecutive time since February.
Recent economic indicators show inflation could rebound within this year as the base effect from last year’s dip in international oil prices wears off. Oil prices have been on the rise recently, too, adding to the growing inflationary pressure on the Korean economy, which heavily dependent on energy imports.
Chinese deflation and default risks from its real estate market also pose risks for the Korean economy. Korea had been expecting its economy to rebound in the second half of 2023 on the back of a recovery in China, which is its biggest trading partner.
The China risk has strengthened the dollar in recent weeks, weakening the value of Korean won in the foreign exchange market.
With the base rate maintained, the policy rate gap between Korea and the US continues to stand at 2 percentage points. If the US Federal Reserve keeps the the target rate unchanged at 5.25-5.5 percent at its next meeting in September as currently expected by the market, the gap will remain at 2 percentage points for a while.
The next rate-setting meeting held by the Bank of Korea will take place on Oct. 19, while the Fed's Federal Open Market Committee meeting is set to be held on Sept. 19-20.
