Bank of Korea Raises Rates Again, Sees Faster Inflation

(Bloomberg) -- The Bank of Korea raised interest rates for the second time since August and signaled it will further pare back stimulus, in an effort to avert asset bubbles and prevent inflation from escalating further.

The central bank’s decision Thursday to lift the policy rate by 25 basis points to 1% was expected by all 19 analysts surveyed by Bloomberg. Following the announcement, the BOK revised up its inflation outlook to 2.3% for this year and 2% for 2022, suggesting it sees price gains exceeding, or hovering around, its target through next year. 

The BOK initiated its tightening cycle in August with a focus on reining in financial imbalances, but inflation has since become an increasing concern. Thursday’s policy statement said the board will judge when to “further adjust the degree of accommodation” taking into account the Covid situation, economic outlook and financial imbalances. 

The Korean won weakened 0.3% against the dollar to 1,189.90 as of 10:43 a.m. in Seoul. Bond futures gained.

Central banks worldwide are grappling with price pressures that threaten to destabilize their economies’ recovery from the pandemic. New Zealand on Wednesday signaled aggressive tightening ahead after hiking for the second time in two months, while surging U.S. prices are pressuring the Federal Reserve to pivot more quickly to tightening.

‘Main Priority’

“The BOK has made clear that its main priority is controlling financial risks amid surging house prices and household debt,” Alex Holmes, Asia economist for Capital Economics, said after the decision. 

“The main risk to the outlook is the recent resurgence in virus cases as containment measures have been eased,” Holmes said, adding that it still won’t stop the bank from more gradual tightening.  

The focus now turns to the timing of the central bank’s next increase. Unlike some central banks, the BOK doesn’t have official guidance for its rate trajectory. Instead, the number of dissenters, the board’s outlook and Governor Lee Ju-yeol’s comments are scrutinized for clues. 

Swaps markets are pricing in the key rate climbing to around 1.75% in the next 12 months, a steeper rise than the median estimate of economists for the benchmark to reach 1.25% by the end of 2022. 

Accelerating inflation and property price gains that show little sign of abating support the case for higher rates. The BOK on Thursday kept its economic growth outlook unchanged from August at 4% for this year and 3% for 2022.    

End of Term 

Adding to uncertainty is Korea’s virus situation: the number of daily cases reached a new record this month as the government loosened restrictions. In addition, while exports have so far benefited from a pandemic-era boom in tech demand, a normalization of that trend could see trade become less of a support to growth.  

After Thursday’s rate review, Governor Lee will have two more decisions before he steps down in March 2022. Economists are split over whether he will use the meetings to push rates higher, or stand pat and leave any further policy changes to his successor.

Further clouding the outlook is a presidential election in March. With President Moon Jae-in’s term ending in May, it’s unclear whether he will opt to leave his mark by naming a new governor, or defer that decision to the next administration.

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