South Korea’s central bank has announced its first ever half-percentage-point rate increase, joining the aggressive policy tightening by the U.S. Federal Reserve and other central banks to tackle high inflation. Analysts forecast more rate increases down the road.
The Bank of Korea raised its benchmark seven-day repurchase rate by 50 basis points–rather than its usual 25 basis points–to 2.25% on Wednesday, increasing the rate for a third consecutive meeting and its sixth rate increase since August 2021.
The bank said in a policy statement after the decision that its board “sees it as important at this time to curb the spread of inflation expectations” with the bigger-than-usual action.
Twenty of 24 analysts surveyed by The Wall Street Journal forecast the 0.5 percentage-point rate increase while the remaining four expected a quarter percentage-point increase. They all expect the bank to keep ratcheting up borrowing costs in coming months.
BOK Gov. Rhee Chang-yong told a news conference Wednesday that the “exceptional” rate decision was unanimous but he stressed that it would be desirable to keep the gradual 25 basis-point rate increases going forward should inflation stay on the projected path.
South Korea was the first major developed economy in Asia to start raising rates last year to tame inflation, but soaring prices are still a challenge.
The country’s headline consumer inflation rate was 6.0% in June–the highest since November 1998 at the height of the Asian financial crisis. The bank expects inflation to beat its earlier projection of 4.5% for the full year of 2022.
South Korea is also under pressure to respond to the Fed’s aggressive policy tightening and the weaker won against the greenback, as higher U.S. rates could risk a flight of foreign capital. The central banks in Canada, Australia and New Zealand have recently delivered outsized rate increases to cool climbing prices.
The won gained 0.6% against the dollar after the bank’s rate increase, paring some of its recent sharp losses. The local currency was still hovering at 13-year lows against the greenback.
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If the Fed raises its funds rate by 75 basis points later this month, as widely anticipated, U.S. policy rates could heap more pressure on the won, ING analysts Robert Carnell and Iris Pang said in a note Wednesday.
The bank said Wednesday it expects the country’s gross domestic product growth this year to miss its earlier forecast of 2.7%, with exports losing steam on weaker demand.
Capital Economics senior economist Gareth Leather said in a research note that he expects inflation to peak soon and start to ease early next year given the recent drop in global commodity prices and weaker global economic growth.
“The upshot is that while the BOK’s tightening cycle has a little further to run in the near term, it is likely to turn decidedly less so further ahead as the economy slows,” said Mr. Leather.