Korean Reinsurance : · BOK's Decision to Freeze the Benchm...

The Bank of Korea (BOK) decided on December 15 to hold the benchmark interest rate steady at 1.25%. The monetary policy board of the BOK appeared to have been between a rock and a hard place. A rate cut would aggravate the increasing household debt risk and spur an outflow of foreign investment funds from Korea, while a rate hike would further weaken the economy, delaying economic recovery.

The rate has been kept unchanged at a record low of 1.25% for the past six months, and the interest rate gap between Korea and the United States has been narrowed further as the US Federal Reserve raised its policy rates by 0.25 percentage points to 0.5% - 0.75% on December 14, 2016.

It was the first rate hike in a year by the Fed, which reflects the US economy is doing fairly well. In the third quarter of 2016, the US economy expanded at a 3.2% annual rate compared with the same period a year earlier - the fastest economic growth in two years. The unemployment rate fell to 4.6% as of November, and the inflation rate reached 1.6%. If the US Fed hikes its rates multiple times next year, the BOK is likely to be pressured to follow suit.