SEOUL – South Korea’s central bank raised its key interest rate by a quarter percentage point today as it struggles to rein in inflation that is expected to hit the highest level in more than two decades this year.
As widely expected, the Bank of Korea’s (BoK) monetary policy board voted to increase the benchmark seven-day repo rate to 2.5% at a rate-setting meeting earlier in the day.
The move represented the BoK’s seventh increase in borrowing costs – 2 percentage points combined – since it delivered its first rate hike in 15 months in August last year to roll back its pandemic-era monetary policy easing stance and cope with fast-growing inflation concerns.
It also came after BoK raised the benchmark rate in the previous three meetings, a first in the central bank’s history.
In July, the central bank delivered its first-ever “big-step” rate hike of 50 basis points.
In a separate announcement, BoK revised its inflation outlook for 2022 from the previous 4.6% to 5.2%, which is the highest projection since it introduced the inflation targeting system currently in place in 1998.
This year’s growth outlook for Asia’s fourth-largest economy was also revised down from 2.7% to 2.6%. BoK announces revised inflation and growth estimates every three months.
Governor Rhee Chang-yong said inflation will likely stay in the 5-6% range until early next year but price growth will likely peak faster than earlier anticipated, thanks in part to a recent drop in crude oil prices.
In July, he predicted inflation will likely peak either in the late third quarter or early fourth quarter.
With regard to the monetary policy path in the months to come, Rhee said BoK will maintain the forward guidance of “piecemeal” rate hikes, referring to quarter point increases rather than pushing for another big step.
“Should there be a shock, we could consider (a big-step rate hike) from a principle point of view, but at this point, we are not considering (the option),” Rhee said in a press conference after the rate-setting meeting.
Today’s rate increase decision also appears to have been influenced by the Federal Reserve’s swift and sharp monetary tightening, including the two consecutive 0.75 point increases in June and July. – Bernama, August 25, 2022
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