The Bank of Korea (BOK) yesterday raised its benchmark interest rate in what could be the final act of its 18-month tightening cycle as economic concerns come to the fore.
The South Korean central bank lifted its seven-day repurchase rate by one-quarter of a percentage point to 3.5 percent, a decision expected by 11 of 16 economists surveyed by Bloomberg.
The remaining five had forecast no change.
Photo: Bloomberg
The board said it would take account of the pace of inflation, and economic downside and financial stability risks in deciding whether to raise rates further.
That indicates the bank is not ruling out an additional hike, although the overall tone of the statement suggested the cycle has come to an end.
The yield on South Korea’s three-year bond fell about six basis points to 3.39 percent following the announcement, while the impact on the currency was more muted.
The outcome shows the BOK’s primary focus remains on controlling inflation, with price growth still running at more than double the central bank’s 2 percent target.
However, BOK Governor Rhee Chang-yong is also trying to engineer a soft landing for the economy as the outlook turns increasingly uncertain.
“Markets would want to know if the BOK will place more focus on inflation or the economy as they decide on their future policy,” Hanwha Investment & Securities economist Lim Hye-youn said. “But if you think about it — inflation remains high even if it has slowed down a bit, which means it’d be difficult for the central bank to cut rates just by looking at the economy’s downside.”
EXPORT SLUMP
Exports have begun to fall, weighing on industrial production, and the housing market is weakening rapidly in a potential threat to credit markets still smarting from the default of a Legoland Korea developer last year.
Those predicting the BOK would keep its rate unchanged cited increasing concerns about the economy’s trajectory.
A Bloomberg survey published this week showed that analysts expect the economy to have contracted last quarter.
Weakening consumption is supporting that view, as the boost from relaxed COVID-19 rules wears off and the impact of rate hikes feeds through the economy. The BOK last year executed two half percentage point rate hikes in an unprecedented move as it sought to keep pace with the US Federal Reserve’s rapid tightening and stem the depreciation of the won.
A deadly crowd crush in Seoul in October last year also dented consumer sentiment, South Korean government officials said.
In addition, the jobless rate last month rose by more than economists forecast, as employers recalibrated hiring plans in preparation for weaker demand.
“The door to a higher rate is still open given inflation remains elevated,” Kiwoom Securities Co analyst Ahn Yea-ha said. “The economy also hasn’t deteriorated yet to a level where you need to stir up expectations for easier policy. Right now it’s important to grapple with inflation expectations.”
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