BOK raises key rate to 1.75%, signals more hikes soon

Bank of Korea (BOK) Governor Rhee Chang-yong bangs a gavel ahead of the central bank's rate-setting meeting at BOK headquarters in central Seoul, Thursday. Yonhap

Central bank increases inflation outlook to 4.5%, lowers growth forecast to 2.7%

By Yi Whan-woo

The Bank of Korea (BOK) hiked its key interest rate by a quarter percentage point to 1.75 percent, Thursday, its first back-to-back rate increase in 15 years, in a desperate bid to fight inflation.

BOK Governor Rhee Chang-yong hinted at additional hikes in the months to come, stressing that the central bank will place a top priority on keeping prices under control over growth for the time being, as higher inflation is projected throughout the rest of the year.

The 25-basis-point rate increase came as monthly inflation accelerated at the fastest pace in more than 13 years last month, reaching 4.8 percent.

Consumer expectations for inflation in the next 12 months also topped a near-decade high of 3.3 percent this month.

The BOK, accordingly, revised up its 2022 projection for inflation to 4.5 percent from 3.1 percent, while slashing its 2022 growth forecast to 2.7 percent from 3 percent.

"We came up with a decision for a rate increase, under the need for a preemptive measure to the negative ripple effects of inflation," Rhee told reporters following his first-rate setting meeting after starting his term on April 21.

He said inflationary pressure is "growing far more than expected" and that monthly inflation may go above 5 percent for a couple of months over protracted supply chain disruptions and rising commodity prices worldwide.

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In particular, soaring crop prices are deepening global inflationary risks as it takes time to grow and harvest them.

"In that regard, we judge the risks associated with inflation are bigger than those of growth, and our monetary policy will focus on price in the several months to come," he said.

Asked about the market forecast that the policy rate will go up to the range of 2.25 percent to 2.5 percent by the end of the year, Rhee called it a "rational expectation."

Still, the BOK governor did not specify how many times and when additional hikes would be delivered, with the monetary policy board scheduled to hold its next meetings in July and August.

Bank of Korea (BOK) Governor Rhee Chang-yong speaks during a press conference at BOK headquarters in central Seoul. Thursday. Yonhap

The U.S. Federal Reserve's faster-than-expected tapering is pushing the BOK to move faster on raising its own key interest rate.

For instance, the Fed minutes on Wednesday indicated that officials are prepared to move ahead with multiple 50-basis-point interest rate increases, after delivering a half-percentage-point hike in its latest rate-setting meeting on May 4.

Taking this into account, Rhee said policy decisions in the future will be made based on the Fed's announcements and other relevant data.

Regarding his recent comment that he does not rule out the possibility of taking a "big step," he reiterated the BOK's clarification that it was rather "a theoretical view that the BOK considers every possibility in its monetary policy."

The term "big step" refers to a hike in the benchmark interest rate by half a percentage point.

He viewed the possibility of a reversal of the interest gap between Korea and the U.S. is growing, over the Fed's tightening of its monetary policy.

Yet, he said, such a reversal will be "within the level for us to withstand."

Korea so far outpaces the U.S. in the range of 0.75 percent to 1 percent concerning the interest gap, but the Fed's policy can bring down the difference, and is feared to result in an outflow of foreign capital.

Some analysts viewed the BOK is "set to turn more dovish later," although it is likely to push ahead with additional hikes in coming months.

"The upshot is that while the BOK should remain hawkish in the near term, it is likely to turn decidedly less so further ahead as the economy slows. In contrast to market pricing for many more hikes in 2023, we think the tightening will finish this year," Alex Holmes, the Emerging Asia economist at the London-headquartered economic research institute Capital Economics, said in an email circulated to financial journalists in response to the BOK's Thursday hike.

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