South Korea is delivering constant interest rate hikes to fight inflation

South Korea is delivering constant interest rate hikes to fight inflation

May 27, 2022: -On Thursday, South Korea’s central bank is hiking interest rates for a second consecutive meeting to wrestle consumer inflation down from 13-year highs and raised its projections for prices to grow to their highest since 2008.

In his first review after taking office in April, governor Rhee Chang-Yong and his monetary policy board voted to increase good rates by a quarter of a percentage point to 1.75%, the highest since mid-2019. All but one of the 28 analysts polled by Reuters expected a hike.

Constant interest rate banks by the Bank of Korea follow over 100 cumulative basis points of hikes since August 2021 in one of the most aggressive tightening campaigns ever by the bank. The BOK boosted its inflation outlook to 4.5% from 3.1% before.

Consumer inflation at a 13-year high threatens to evolve entrenched, as a critical measure of inflation expectations among South Koreans increased in May to its most elevated in almost a decade.

Most analysts expect the BOK to take rates up to 2.25% by year-end. Many say it will need to consider how quickly to apply the brakes between slowing economic growth in China, the vast trading partner, and high household debt.

The U.S. Federal Reserve is forecast to take the key interest rate to 2.50-2.75% by year-end, watched around the world. At the same time, in China, authorities are seen easing policy to cushion a slowdown in the second-largest economy in the world.

“Inflation concerns have become more pronounced, with headline CPI growth hitting record levels and unemployment still at a record-low level,” said Oh Suk-Tae, an analyst at Societe Generale, who sees the base rate peaking at 2.50% by the end of this year.

“It would be difficult for policymakers to extend the rate-hike cycle into 2023, as we expect the peak-out of inflation in the second quarter of this year.”

In the previous year, Governor Rhee said the bank could consider big-step interest rate boosts in future months, like 50 basis point hikes, depending on data available around July and August.

The BOK expects the economy to develop by 2.7% this year, down from its forecast of 3.0% and slowing from almost 4.0% for 2021.

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South Korea is delivering constant interest rate hikes to fight inflation