Bank of Korea expects monetary tightening to weigh more heavily on growth this year

SEOUL (Reuters) – South Korea’s central bank said the lagged effects of its aggressive streak of monetary tightening would have a bigger negative impact on economic growth this year than in 2022.

The Bank of Korea (BOK) estimated that its 300 basis points of rate increases in the current tightening cycle would drag down the country’s economic growth rate by 1.4 percentage points in 2023, compared with 0.9 percentage points last year.

They are expected to lower consumer inflation by 1.3 percentage points this year, versus 0.4 percentage points a year before, according to the central bank’s quarterly monetary policy report submitted to parliament on Thursday.

The BOK held interest rates steady last month and said it would not resume tightening if inflation followed its expected path, after a year of uninterrupted hikes and a total of 10 rate increases since August 2021.

Governor Rhee Chang-yong said on Tuesday it was too early to discuss rate cuts but that the central bank would start to consider them should the inflation rate fall toward 3% near the end of this year.

The BOK cited high household debt and restrictive interest rates as factors intensifying the spill-over effects, while also noting that public cost increases and their impact on inflation expectations may cause consumer inflation to ease at a slower rate than expected.

On foreign exchange, the central bank’s monetary tightening relieved, by some degree, the weakening pressure on the Korean won that stemmed from the U.S. Federal Reserve’s interest rate hikes, the BOK said.

Still, external factors such as U.S. monetary policy have had a bigger impact on foreign exchange than internal factors, it added.

The report said house prices are likely to see further declines this year, given the usual persistence of negative sentiment in the property market.

(Reporting by Jihoon Lee; Editing by Shri Navaratnam)