Korea’s central bank issues a warning that Q4 GDP growth will likely be negative

Rhee Chang-Yong, the governor of the Bank of Korea (BoK), predicted on Friday that the economy would experience negative growth in the fourth quarter. According to him, the reasoning behind this will be unfavorable conditions like weak chip demand and COVID-19 infections in China. However, it should still report 2.6 percent growth for the entire year.

“The risk of a negative growth has increased,” Rhee told reporters after the central bank increased the base rate by 25 basis points in this year’s first increase in response to rising prices and the likelihood that the U.S. Federal Reserve will continue raising interest rates. In two weeks, we will be announcing fourth-quarter growth, Rhee stated.

Because of the Itaewon crowd crush, a decline in chip demand, and an increase in COVID-19 infections in China, the indicators are still weak. The Korean economy expanded by 0.6 percent in the first quarter of last year compared to the same period the year before, 0.7 percent in the second quarter, and 0.3 percent in the third.

Although there are several positive aspects in the first quarter, such as a potential upward revision in growth in the U.S. and Europe, Rhee also cautioned that this year’s economic growth could fall below its November prediction of 1.7 percent.

Bank of Korea policy rate

After a similar increase in November that had put the base rate at an 11-year high, the BoK increased the policy rate by 25 basis points to 3.50 percent at its first rate-setting meeting of the year. After hitting a record low of 0.50 percent in August 2021, the BOK started to raise the benchmark rate. In July and October of last year, the rate saw a remarkable 50 basis point increase on two occasions, rising to 2.25 percent in July and to 3 percent in October from an initial rate of 1.75 percent. At 12:45 p.m. on Friday, the benchmark Kospi increased 0.9 percent to 2,386.31.

The US dollar decreased by 4.6 won to 1,243.4 won. The increase came as the cost of gas, electricity and other public utilities continued to rise, adding to the inflationary strain. Consumer prices increased by 5% year over year in December, continuing an eight-month streak of increases above 5%, and will increase by 5.1% overall in 2022, the quickest rate since 1998. Although the pace slowed in 2022, the U.S. Federal Reserve should also increase interest rates further later this month. Following the U.S. Federal Reserve’s hike of 50 basis points in December, the federal funds rate currently stands between 4.25 and 4.50 percent. The won’s depreciation and possible foreign capital flight have sparked concerns, mainly because it has a weaker base rate than that of the United States.

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