Bank of Korea to raise rates on Thursday as price pressures mount

Bank of Korea to raise rates on Thursday as price pressures mount

South Korea’s central bank will raise its key interest rate again on Thursday to fight inflation, according to a Reuters poll of economists, but they are divided on how high borrowing costs will be by the year-end.

Inflation in South Korea accelerated to an almost 24-year high in July of 6.3% and was expected to continue to rise for a few more months, leaving the Bank of Korea (BOK) with little choice but to remain aggressive.

All but one of the 36 economists polled Aug. 16-22 forecast the Bank of Korea will raise its policy rate (KROCRT=ECI) by 25 basis points to 2.50% at its Aug. 25 meeting. One expected a 50 basis point hike.

If the majority view prevails, it would take rates to twice where it was before the pandemic.

“With headline inflation accelerating in July and core inflation rising, containing price pressures will remain a top priority, with rate hikes on the cards,” noted Krystal Tan, economist at ANZ.

“We maintain that the BOK’s rate hiking cycle will end in 2022.”

Although inflation was expected to peak soon, and with stronger growth headwinds, economists were divided on where rates would be by the year-end. Three said the central bank would stop at 2.50%, half of respondents said at 2.75%, 14 said 3.00% and one had a 3.25% forecast.

Most economists expected the central bank to then stop, making it one of the first major Asian central banks to end its monetary policy tightening. The Reserve Bank of New Zealand, Reserve Bank of Australia and Reserve Bank of India are not expected to reach their peak rates until 2023.

“The BOK was really on the front foot when it came to the need for monetary policy normalisation. So, the fact we are expecting them to slow is really a trend we expect to see from other central banks in our region as well,” said Katrina Ell, senior economist at Moody’s Analytics.

Nearly 90% of respondents, 30 of 34, who answered an additional question expected a 25 basis point hike in October but 53% expected no rise in November.

The central bank has raised rates by 175 basis points since August 2021, including by an unprecedented half a percentage point in July.

That along with worries of slowing global growth and weak Chinese import demand support the case for slowing the pace of rate hikes.

Nearly 80%, 21 of 27 economists expected rates to be 2.75% or lower by end-2023. The median showed a 25 basis point cut in the first quarter of 2024.