[ANALYSIS] Inflation concerns to push Bank of Korea to remain hawkish next year

The Korea Times

The Korea Times

Finance

Thu, December 7, 2023 | 22:53

Economy

ANALYSISInflation concerns to push Bank of Korea to remain hawkish next year

Posted : 2021-10-03 15:42

Updated : 2021-10-04 09:11

A medical worker wearing protective gear in a booth takes a sample from a person at a temporary coronavirus testing clinic in Seoul, Sept. 29, AP-Yonhap

Three more rate hikes are expected next year: economists

By Kim Yoo-chul

The central bank continues to signal a benchmark rate hike as the latest developments in economic growth and inflation are forcing the Bank of Korea (BOK) to take pre-emptive steps.

The country's economic recovery from the effects of the COVID-19 pandemic is becoming increasingly evident, backed by consumption growth and exports, while the BOK and the finance ministry are revising up their GDP growth forecast to over 4 percent this year. As a result, the primary focus of the BOK's monetary policy recently shifted to a gradual normalization from cushioning any downside risks.

This rationale makes sense indeed, because the previous years of ultra-low accommodative monetary policies pursued by the BOK have been cited as a major factor contributing to an asset bubble, with more Koreans suffering from snowballing household debt and becoming vulnerable to tapering by the U.S. Federal Reserve.

And a power shortage in China is adding pressure on the prices of raw materials. A squeeze in the supply chain of raw and other materials ― from gas to semiconductors ― is also increasing logistics costs and causing bottlenecks in component-oriented ecosystems. This trend is adding pressure to inflation.

Some economists said Sunday that the BOK will remain hawkish in assessing its monetary policy throughout next year, as raising the key rate is the most effective policy available to address inflation concerns.

The focus is when and how many times the benchmark rate will be raised. The BOK is projected to raise the key rate once more this year ― possibly October ― by 25 basis points. And the bond market forecasts the BOK to raise the benchmark rate three more times next year ― 25 basis points each.

"The BOK is evaluating whether a recovery of household income will offset the estimated burden of paying additional interest stemming from hikes in the benchmark rate," Kim Ye-jin, an analyst at Korea Investment & Securities, said.

On a related note, IHS Markit, a market research firm, said the economic growth outlook for this year has been helped by strengthening private consumption and surging electronics exports, with a GDP growth of 4 percent, year-on-year, forecast for the next calendar year.

"Rapidly rising COVID-19 vaccination rates are expected to help contain the pandemic in the fourth quarter of this year and during the first half of 2022," Rajiv Biswas, chief Asia-Pacific economist at IHS Markit was quoted as saying in a report, last week.

Federal Reserve Chairman Jerome Powell in Washington, D.C., Sept. 28 / Reuters-Yonhap

The BOK's monetary policy is made in tandem with the Fed's moves. Some Wall Street analysts have said that rising COVID-19 infection rates and views that U.S. economic growth has peaked could be making the Fed more hesitant to stop its accommodative policies. However, rising inflation concerns in the world's largest economy could justify the Fed's tapering of its asset purchases.

Federal Reserve Chairman Jerome Powell sees the current inflationary pressures as running into next year. At a recent event, Powell said he was "frustrated" to see the bottlenecks and supply chain problems not getting better. Powell added, "We see that continuing into next year probably, and holding up inflation longer than we had thought."

Economists believe the Fed could begin tapering asset purchases earlier than expected to make sure that inflation is kept at targeted levels.

"Well, I would say that the BOK will raise its benchmark rate by 25 basis points in November. But the minutes of the BOK's October policy meeting ― in which I expect to see its decision to freeze rates ― will include the specifics of its clear rationale on why additional rate hikes matter," said a senior representative at a U.S.-based investment bank in Seoul, adding that the BOK will try to minimize the effects of ending its accommodative monetary policy stance on the local equity market.

The European Central Bank has begun initiating its tapering by lowering the amount of bond purchases. Brazil, the top economy in South America, is seen to increase its benchmark rate to 8.75 percent by the end of this year from the 2 percent that it had maintained last year. Norway dropped its zero-interest rate policy by raising its key rate, while the Czech Republic surprised markets by hiking its benchmark rate 75 basis points against the market's expectation of a 50 basis-point increase. Mexico, Colombia and Chile have also joined in the tapering trend.

yckim@koreatimes.co.kr