Hike rates

Bank of Korea to raise rates by historic 50 bps

By Shaloo Shrivastava and Cynthia Kim

(Reuters) – South Korea’s central bank will make its first ever 50 basis point rate hike to 2.25% on Wednesday, mounting pressure in a rate hike campaign as inflation hits a 24-year high and has yet to peak, a Reuters poll showed on Monday.

One of the first central banks to start raising rates, in August 2021, the Bank of Korea is still grappling with inflation, which hit 6.0% in June, the highest since November 1998, as an Asian financial crisis was in full swing.

To stop further price increases and cushion the currency’s fall, 27 of 32 economists polled in a July 4-8 Reuters poll expected the BoK to opt for an unprecedented half-point hike on July 13. Only five expected a quarter-point increase.

The BoK is one of many central banks feeling the pressure from an aggressive interest rate hike campaign by the US Federal Reserve, which has propelled the US dollar to its highest level in two decades.

The Korean won has been one of the worst performers in emerging markets this year, falling more than 8.5% and expected to decline further.

Krystal Tan, an economist at ANZ, believes inflation has not yet peaked as energy costs, which the central bank cannot control, continue to rise and affect consumer prices.

“A hawkish U.S. Fed at a time when South Korea’s (balance of payments) position is under pressure also supports the case for more aggressive tightening,” said Tan, who is eyeing a move. 50 basis points on Wednesday.

Some analysts have urged caution before opting for a half-point hike on Wednesday as South Korea is expected to feel the fallout from slowing global growth and rising interest rates.

“We need tighter monetary policy to contain inflation, but we also face greater external uncertainties with higher rates,” said Lee Jae-hyung, an analyst at Yuanta Securities, who is the one of five analysts to see a 25 basis point rate hike on Wednesday.

Overseas sales of South Korean goods posted their weakest growth in 19 months in June, fueling worries about the economy, while household debt hit a record high.

President Yoon Suk-yeol said last week that the economy was in “an emergency” as soaring inflation reduced people’s purchasing power.

BoK Governor Rhee Chang-yong recently said the bank would look at data on inflation and the burden of household debt repayments as well as the exchange rate before deciding on the size of any rise in interest rates. rate in July.

All but one of the economists in the latest Reuters poll predicted another 25 basis point hike at the following August meeting, with one saying there was no movement.

That would take the base rate to 2.50% by the end of the third quarter, up from 2.0% expected in a May poll. It should end the year at 2.75%, compared to 2.25% in the May poll.

Growth forecasts for Asia’s fourth-largest economy have been lowered to 2.5% for 2022 and 2.4% for 2023, from 2.8% and 2.6% in a poll in April.

The poll predicted that inflation would remain above the BoK’s 2.0% target even next year. It was expected to average 5.0% in 2022 and 2.7% in 2023, up significantly from the 3.3% and 2.0% in the April poll.

For other articles in Reuters’ long-term global economic outlook poll series:

(Reporting by Shaloo Shrivastava; Polling by Devayani Sathyan, Arsh Mogre and Anant Chandak; Editing by Ross Finley, Jonathan Oatis and Sam Holmes)

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