South Korea steps up inflation fight with back-to-back rate hikes -Breaking
Joori and Cynthia Kim
SEOUL (Reuters), – South Korea’s central bank delivered two consecutive interest rate increases on Thursday and predicted further aggressive rises to reduce consumer inflation from its 13-year peak.
The Bank of Korea raised its benchmark interest rate 25% to 1.755%. This is the largest increase since mid-2019. It joins a worldwide wave of tightenings by central banks as they deal with unprecedented price increases.
New Zealand’s central banks increased their interest rate by 50 basis points on Wednesday.
Inflation forecasts were raised by the BOK to 4.5% this year. This is the highest level since 2008. It was more than twice the target of 2%. The increase in commodity prices caused by wars in Ukraine and disruptions in the global supply chain has pushed up the cost of commodities.
Following the unanimous rate decision of six board members, Governor Rhee Changyong declared that price stability will be our policy focus for a while.
Reuters polled all 28 analysts, and only one predicted a hike.
BOK’s back-toback rate increases follow more than 100 basis point cumulative hikes in August 2021 as part of its tightening campaign.
Consumer inflation at an all-time high of 13 years is a concern. This could lead to consumer inflation becoming entrenched. In May, a measure that gauges South Koreans’ price expectations rose to their highest level in almost a decade.
“The Board considers it appropriate to conduct monetary policies with more emphasis upon inflation for some time,” said the BOK’s statement. Analyst Cho Yong Gu from Shinyoung Securities believes this is the strongest signal for further rate increases.
Cho indicated that he saw the bank raise rates in August and July, and was even open to changing the year-end projection from 2.25% earlier to 2.50%. This is based on the hawkish message in the statement.
Following the announcement of hawkish policies, June futures for three-year Treasury bonds fell as high as 29 points to reach 105.43 in June.
Many analysts believe that the BOK would raise interest rates to 2.25% before year-end. Then, it will have to think about how to slow down economic growth in China and the high level of household debt.
By year-end, the U.S. Federal Reserve will increase the key interest rate by 2.50-2.75%. This is a closely watched event globally. In China, however, officials are easing their policy to mitigate a slowdown in China’s second-largest economy.
Rhee commented on the risks of stagflation and said that growth was weaker than expected, but not near recessionary levels. This is despite slower global demand which is likely to affect South Korea’s exports during the second half.
BOK predicts that the economy will grow 2.7% in 2018, down from 3.0% forecast and slower than its 2021 estimate of 4.0%.
Capital Economics Asia economist Alex Holmes said, “The bottom line is that although the Bank should be hawkish for the short term, it’s likely to become decidedly less so in the future as the economy slows,”