Joori and Cynthia Kim

SEOUL (Reuters – South Korea’s central bank increased its benchmark rate by 1% on Thursday, in a surprising move to combat rampant inflation that threatens the country’s economic recovery.

The first time rate review was held without a Governor. In this vote, the bank’s monetary policies board voted for a 25% increase in interest rates to 1.50%. That is less than 50% of economists expected according to Reuters.

Analysts had predicted that the Bank of Korea will keep rates at their current levels until its new governor takes office. This is after Lee Juyeol’s tenure as chief was over.

Joo Sangyong, the acting chair of the six member policy board, stated that the bank cannot wait to appoint a governor in order to maintain efforts to reduce inflation. He also warned that price growth could reach 4%, up from 3.1% forecasted for February.

Paik Yoonmin, an analyst with Kyobo Securities who believes the policy rate will be at 2.00% before the year ends, stated that “a back-toback rate rise in May” is also possible.

“If it starts to make big steps hikes starting in May, South Korea’s rate will catch up and the Fed will weaken its pre-emptive moves made by the BOK.”

STAGFLATION RISKS

Even though the rise was not in line with economists’ predictions, investors still saw April as an opportunity for tightening. However, the Korean won (and bond yields) were little affected following the announcement.

The yield of three-year Treasury Bonds fell in fact after Joo addressed a conference on downside growth risks.

According to a policy statement by the BOK, South Korea’s expected economic growth was lower than its February forecast of 3.3%.

Inflation in South Korea will likely remain at decade highs due to Russia’s invasion Ukraine sending commodity prices skyrocketing.

The rate decision on Thursday comes just after Canada and New Zealand both gave rises of 50 basis points. This is a shift in the focus of Asia-Pacific central banks away from supporting economic growth and towards combating rising inflation.

Analysts predict that South Korea will have a policy rate of 2.00% at the end this year.

Rhee Chung-yong is a South Korean central bank chief nominee and a long-standing International Monetary Fund official. He will begin his 4-year term following the required parliamentary hearing.

As the possibility of higher U.S. rates hikes fueled concerns over the economy’s ability to weather rising financing costs, the yield of the three-year most liquid treasury bonds soared to 3.2%.

In March, the Federal Reserve increased the target range for its policy rate. This was the first increase since 2018. Analysts predict that it will tighten monetary policy more aggressively to combat inflation.