South Korea steps up inflation battle with surprise rate hike

© . FILE PHOTO: The Bank of Korea logo is seen on top of its building in Seoul, South Korea, March 8, 2016. REUTERS/Kim Hong-Ji By Cynthia Kim and Joori Roh SEOUL () – The Central Bank of South Korea Thursday raised its benchmark rate to its highest since August 2019, a surprising move as it stepped up its fight against rampant inflation, which threatens economic recovery. In the first-ever rate review held without a governor, the bank’s monetary policy council voted to raise interest rates by a quarter of a percentage point to 1.50%, an outcome less than half of economists had predicted in a poll. from . Most analysts had expected the Bank of Korea to keep rates unchanged until the new governor took office, after Lee Ju-yeol’s term as head ended last month. Joo Sang-yong, acting chairman of the six-member policy council, said the bank could not wait for the formal appointment of a new governor to continue efforts to slow inflation and warned that price growth is likely to stay above 4% for a while. came in, higher than the February forecast of 3.1%. “A back-to-back rate hike in May is also likely,” said Paik Yoon-min, an analyst at Kyobo Securities, which sees the key rate at 2.00% by the end of the year. “If the Fed takes major steps from May, it will soon overtake South Korea’s key rate and weaken the effectiveness of BOK’s preventive measures.” STAGFLATION RISKS While the rise went against most economists’ official forecasts, a tightening in April was seen as a real prospect by many investors and the Korean won and bond yields were little affected by the move. Three-year government bond yields fell even after Joo spoke at a news conference about downside risks to growth. In a policy statement, the BOK said South Korea’s economic growth is expected to be lower than its February forecast of 3%. At the same time, inflation in South Korea is expected to remain at a 10-year high as the Russian invasion of Ukraine pushes commodity prices up. Thursday’s interest rate decision comes after New Zealand and Canada both raised 50 basis points and other central banks in Asia Pacific shifted their focus from supporting growth to fighting rising inflation. Analysts expect South Korea’s key rate to reach 2.00% by the end of this year. Rhee Chang-yong, a senior International Monetary Fund official and South Korea’s central bank chief candidate, is expected to begin his four-year term after the necessary parliamentary hearing on April 19. The yield on the most liquid three-year Treasury bond surpassed 3.2% this week, reaching levels not seen since 2012, as the prospect of faster rate hikes in the US fueled concerns about the global economy’s ability to withstand higher borrowing costs. The Federal Reserve raised its key rate target in March in its first upward shift since 2018, and analysts predict it will become much more aggressive in tightening monetary policy to ramp up the fight against inflation.

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