Korea's central bank likely to raise key rate this week to tame inflation

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Korea's central bank likely to raise key rate this week to tame inflation

In this Nov. 25, 2021 file photo, Bank of Korea Governor Lee Ju-yeol speaks at a press conference to explain a rate hike decision. Yonhap

South Korea’s central bank is widely expected to raise its key interest rate at a rate-setting meeting later this week to tame growing inflationary pressure, reflecting the U.S.’ Federal Reserve’s faster-than-expected move to tighten its monetary policy, experts said Monday.

Some still raised the possibility the Bank of Korea (BOK) could stay put this week given persistent uncertainty over the coronavirus pandemic and the Omicron variant, voicing worries that a further increase in borrowing costs could knock the economy off its still fragile recovery trend.

On Friday, the BOK is set to hold this year’s first rate-setting meeting to determine whether to raise its policy rate.

The meeting comes after the central bank raised the rate by a quarter percentage point to 1 percent in November, ending two years of the zero range rate put in place to prop up the pandemic-hit economy. The decision followed a 0.25 percentage point rise in August, the first pandemic-era hike.

Voicing concerns over rising consumer prices and financial imbalance caused by protracted low borrowing costs, BOK Gov. Lee Ju-yeol earlier said the current monetary policy is still “accommodative” and left the door open for the possibility of further rate increases early this year.

“Given that inflationary pressure is mounting, the chances are high that the BOK will raise its policy rate this month,” said Cho Young-moo, a researcher at LG Economic Research Institute.

Yoon Yeo-sam, an analyst at Meritz Securities in Seoul, echoed the view, saying rising inflationary pressure amid the prospects for continued economic recovery warrants a rate hike this week.

“It is very likely that inflation will grow at more than 2 percent on an annualized basis this year at a time when it is still valid to forecast that the economy will continue to recover, driven mostly by exports growth,” he said.

They were among 17 out of 18 economic think tanks that predicted a rate hike this week in a recent survey conducted by Yonhap Infomax, the financial news arm of Yonhap News Agency.

Behind the prediction lie deepening worries over inflation pushed high by a rebound in consumption long subdued due to the pandemic, coupled with shortages caused by global supply snarls.

The country’s consumer prices jumped 3.7 percent in December from a year earlier, marking three straight months of inflation rising more than 3 percent. For 2021, consumer inflation rose 2.5 percent from a year earlier, the fastest growth in 10 years.

Another reason for raising the possibility of a rate hike this week is recently unveiled minutes of the U.S. Federal Reserve’s December rate-setting meeting that indicated the Fed will likely speed up the tightening of its loose monetary policy “sooner or at a faster pace.”

The Fed had been widely expected to wind down its pandemic-era asset buying stimulus program in March and start to raise its near-zero interest rates in June, but the latest minutes raised the possibility that rate increases could come as early as March.

Experts said such faster rate hikes by the U.S. could narrow the spread with South Korea, which could increase foreigners’ risk-averse attitude and convince them to withdraw their money out of the market here, saying the need will grow for the BOK to take proactive action to stem such outflow by raising its borrowing costs in lockstep.

“In consideration of the fast transfer of shocks from the spread issue likely to be caused in the process of the U.S.’ fast policy normalization, it will be necessary to raise (South Korea’s) interest rates as well at a relatively faster pace,” KB Kookmin Bank researcher Kim Seon-tae, said.

Korea's central bank likely to raise key rate this week to tame inflation

Shoppers pick vegetable at a retail outlet in Goyang, Gyeonggi Province, Jan. 9. Yonhap

Some still urged the BOK to stay put this week, saying further rate hikes could put a damper on the economic recovery amid persistent uncertainty over the global pandemic.

They, in particular, cited the Seoul government’s reimposition of stricter social distancing rules and curbs on business operation after the country tried in vain to return to normalcy under the living with COVID-19 scheme early in November as most people were vaccinated against the virus.

The emergence of the potentially more transmissible Omicron variant of COVID-19 has further increased uncertainty since the first cases were reported in early December.

“Things have not changed at all when it comes to the coronavirus,” Kang Sung-jin, an economics professor at Korea University, said. “The BOK will feel burdened in raising the key rate at this time.”

“More emphasis should be placed on the pandemic than on inflation,” he added. “There had been no Omicron issue until November, but with its spread, there seems to be few signs that the coronavirus situation will improve (any time soon).”

Pessimists about a rate hike this week still agreed the BOK is very likely to increase the borrowing costs in February, given that the month would be the last chance for Gov. Lee to realize the oft-vowed objective of bringing the country’s loose monetary policy back to pre-pandemic levels before leaving office in late March.

The BOK will also find it hard to push ahead of a rate hike in March, when the presidential election will be held, as a new government could bring about a sea change in economic and monetary policy.

The central bank is scheduled to hold its next rate-setting meeting on Feb. 24. (Yonhap)

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