Bank of Korea to focus on fight against inflation
SEOUL: The Bank of Korea (BOK) says it will place greater emphasis on tackling inflation after raising its key interest rate and forecasting much faster price growth this year, as Rhee Chang-yong helmed his first meeting as governor.
The South Korean central bank increased its seven-day repurchase rate by a quarter percentage point to 1.75% yesterday for its fifth hike since last summer.
All 18 analysts surveyed by Bloomberg had expected the move.
The BOK now sees inflation at 4.5% this year, a sharp upward revision from its previous 3.1% forecast made in February.
At the same time it cut its growth view to 2.7% from 3%, an indication of the headwinds for the economy that the central bank must be careful not to add to.
The latest decision showed that Rhee was keen for the BOK to push ahead with policy normalisation, remaining in the vanguard of central banks raising rates, and that he saw enough resilience in the economy to do so.
Most major central banks were now tightening policy as they grew alarmed by inflationary pressure fuelled by pandemic-era stimulus, supply chain disruptions and Russia’s war on Ukraine.
“The jump in inflation forecasts signals the BOK is set to keep raising interest rates in the coming months,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities.
South Korean bonds edged down after the central bank boosted its inflation forecast.
In a statement after the decision, the central bank underlined its commitment to focus more attention on inflation as it warned of higher price growth to come.
“Looking ahead, it is forecast that consumer price inflation will remain high in the 5% range for some time, and run at the mid-4% level for the year overall,” the BOK said.
Consumer prices in South Korea grew at the fastest pace since 2008 last month and the governor had said that inflation was a bigger concern for the bank than other headwinds to economic growth.
Yesterday’s decision followed April’s move by the bank to raise the rate by 25 basis points even without a governor in place.
The rate hike is the first since president Yoon Suk Yeol took office earlier this month.
While Yoon has vowed to deliver faster economic growth, he has also highlighted inflation as a serious risk to the economy.
The central bank decision followed comments from South Korea’s vice-finance minister earlier in the day that the government planned to announce further measures to stabilise prices early next week.
At the same time, the government has unveiled its biggest ever extra budget, as it offers further support for the economy, that provides the BOK with more scope to keep raising rates to tackle inflation.
Inflation expectations this month climbed to the highest level in almost a decade, an indication that consumers are increasingly conscious of the upward trajectory of prices.
If inflation accelerates too quickly, consumption is at risk of weakening in a setback for the recovery.
“This high inflation forecast raises new questions about how high the benchmark rate will now have to go,” said Kang Seungwon, an economist with NH Investment and Securities.
The Bok’s new growth forecast in contrast appears optimistic, given exports are likely to deteriorate toward the end of the year, he said, forecasting a 2.5% expansion for the year.
While Omicron led to a slowdown in economic growth in the first quarter, a pickup in consumption after virus restrictions were eased and resilience in exports have enabled the BOK to stay on a path toward policy normalisation for now. Bloomberg