The South Korean central bank yesterday raised interest rates for the third time since the summer, underscoring the board’s determination to swiftly curb inflation and financial risks, and its belief that the economy can weather outbreaks of COVID-19 with less support.
The Bank of Korea’s 0.25 percentage point increase to 1.25 percent brings the rate back to where it was before the pandemic.
The decision was expected by 14 of 19 economists surveyed by Bloomberg.
The rest forecast a hold.
Bond futures fell as the monetary policy statement suggested rate hikes will continue.
The bank said in a statement that it expected inflation to stay in the 3 percent range “for a considerable time.”
That view is in stark contrast to its stance in November and an indication of how price concerns have ballooned since then.
The rare back-to-back rate hike likely indicates that Bank of Korea Governor Lee Ju-yeol had become increasingly uncomfortable about waiting to move again, following recent signs that the US Federal Reserve will probably raise borrowing costs earlier and more aggressively.
An easing of daily COVID-19 infections from a peak last month also helped create a window of opportunity that Lee was apparently keen to take before the end of his term in March and a presidential election the same month.
Government plans for an extra budget indicate that there will be continued fiscal support for the economy, adding to the case for a hike.
The rate decision shows that the bank saw the economic impact of outbreaks of the Omicron variant of SARS-CoV-2 as limited and was concerned that the variant is likely to add upward pressure on inflation, said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities.
“Financial imbalances are yet to be fully resolved, and the Fed bringing forward its tightening timing was also likely a factor,” Cho said.
The latest rate move puts the Bank of Korea further ahead of global peers in pulling back from pandemic stimulus settings as an increasing number of central bankers consider the timing of their own actions.
Lee has said that the Bank of Korea does not need to match the Fed on rate hikes, but no action taken this quarter despite the hawkish signals from the Fed could have unsettled financial markets expecting rate increases.
Maintaining a premium over US interest rates can help maintain stability in local markets and prevent a further weakening of the won.
South Korean Minister of Finance Hong Nam-ki on Monday ordered officials to closely monitor foreign exchange movements after the currency last week reached its weakest level since July 2020.
While the South Korean central bank largely justified its initial rate hike in August as a move to avoid financial imbalances building up from prolonged stimulus, it has since added its concern over rapid price growth into the mix.
At 3.7 percent, inflation is hovering near a 10-year high, providing a key motive for early action.
In yesterday’s statement, the Bank of Korea said that inflation will average above the mid-2 percent level this year, higher than the 2 percent it forecast in November.
The bank still expected economic growth of about 3 percent.
The board will judge when to further adjust policy accommodation, it said, indicating more tightening ahead.
The economic backdrop has been supportive of a hike. Despite virus restrictions, the broader economy appears to be holding up better than in previous waves, with export strength continuing and consumption taking less of a hit.
Attention now will turn to whether the Bank of Korea can continue to raise rates at such a pace — three times in five months — or whether there will be a lengthy hiatus before the next move.
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