Hike rates

Bank of Korea likely to hike rates again on high inflation, household debt: Reuters poll

The Bank of Korea logo is seen atop its building in Seoul, South Korea July 14, 2016. REUTERS/Kim Hong-Ji

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BENGALURU, Jan 12 (Reuters) – (This January 11 story corrects to clarify milestone over more than a decade, not two decades, in 4th paragraph)

The Bank of Korea is likely to raise its key rate to its pre-pandemic level on Friday, according to a Reuters poll, as it seeks to limit rising inflation and the increase in debt that households are taking on to buy a property.

Twenty-five of 35 economists who responded to a Reuters poll from Jan. 5-11 said the BOK would raise its base rate (KROCRT=ECI) by 25 basis points to 1.25% at its policy meeting on Jan. 14. January. This was its level in February 2020, just before the coronavirus crisis broke out.

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South Korea’s central bank was the first and only among its major Asian peers to raise interest rates twice last year, most recently by 25 basis points at its last meeting in November. .

The BOK has not raised rates in consecutive meetings for more than a decade.

“Although economic uncertainties at home and abroad are increasing, Governor Lee Ju-yeol reaffirmed his commitment to normalize monetary policy to address financial imbalances with remarks on rising house prices and the increase in household debt,” said fixed-income analyst Paik Yoon-min. at Kyobo Securities.

“The fact that inflationary pressure may continue for a considerable period of time is also seen as a factor that strengthens the case for raising interest rates.”

Inflation in Asia’s fourth-largest economy accelerated last year to its highest level since 2011, far exceeding the central bank’s own forecasts, suggesting to policymakers that a period of rising prices would take longer than expected.

This strengthens the case for the BOK to prevent inflation from accelerating further at a time when property prices have soared.

After an expected hike on Friday, the BOK is expected to remain on hold in the first half of this year, then proceed with another rate hike in the third quarter to 1.50%. He was then to remain there at least until 2023.

Still, more than a quarter of respondents did not expect a rate hike at the Jan. 14 meeting.

“The Bank of Korea rarely raises interest rates in back-to-back meetings. After November’s hike, we expect the policy rate to remain unchanged on Friday,” said Capital Economics’ Alex Holmes, who forecasts three hikes of rate later this year.

Reuters poll: Bank of Korea policy and South Korea’s economic outlook

South Korea is also preparing for a presidential election in March. Some analysts say the recent increase in cases of the Omicron variant coronavirus will encourage the BOK to be cautious in its monetary policy.

Six of the seven respondents to an additional question said the risks to their inflation forecasts were more on the upside.

Five of the seven said the risks to their growth forecast were on the downside.

The economy is expected to grow 2.9% and 2.5% this year and next, a slowdown from 3.9% last year, based on the poll’s median forecast.

(For other Reuters Global Economic Survey articles: read more)

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Reporting by Tushar Goenka in BENGALURU, additional reporting by Jihoon Lee in SEOUL; Poll by Devayani Sathyan, Prerana Bhat and Md Manzer Hussain; Editing by Kevin Liffey

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