South Korea’s central bank lifted its key interest rates on Wednesday, citing tightening stance of the US Federal Reserve and stubbornly high inflation.
The Monetary Policy Board of the Bank of Korea decided to raise the Base Rate by 50 basis points to 3.00 percent from 2.50 percent, as widely expected.
Among seven members, two policymakers voted against the decision to raise the Base Rate by 50 basis points, proposing to hike it by 25 basis points.
The central bank has hiked its policy rate by altogether 250 basis points in the current tightening cycle that began in August 2021.
“The Board sees continued rate hikes as warranted, as inflation is expected to remain high, substantially above the target level, although domestic economic activity has slowed,” the bank said in the statement.
Domestic economic growth is expected to slow due to weaker export growth. The bank expects GDP growth for this year to be generally consistent with the August forecast of 2.6 percent, but that for next year was projected to be below the previous forecast of 2.1 percent.
The bank said consumer price inflation will remain high in the 5-6 percent range for a considerable time as the impact of the rising Korean won to US dollar exchange rate acts as additional inflationary pressure.
Inflation is seen at 5.2 percent this year and 3.7 percent in 2023, but upside risks are judged to be high due to the rising Korean won to US dollar exchange rate and production cuts by major oil-producing countries, despite downward pressures from the economic slowdown.
The BoK is set to hike the rate by 25 basis points at its final meeting of the year in November, as the central bank continues to prioritize the fight against inflation, Capital Economics economist Gareth Leather said.
Although upside risks on inflation are growing, Korea’s consumers are highly sensitive to interest rates, given the large exposure to variable rate loans, Min Joo Kang, an ING economist, said.
Inflation is expected to come down quite sharply from the end of next quarter, the economist noted. In turn, the BoK is likely to stay on hold for a while next year before commencing its easing cycle towards the year-end, the ING economist added.
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