Bank of Korea takes base rate to 1.5%, up a quarter point

Finance

Published: 14 Apr. 2022, 16:54 Updated: 14 Apr. 2022, 19:39

Bank of Korea takes base rate to 1.5%, up a quarter point

Acting Monetary Policy Board Chief Joo Sang-yong, center, presides over a meeting in central Seoul Thursday. [BANK OF KOREA]

The Bank of Korea raised rates 0.25 percentage points Thursday as inflation rages globally and central banks elsewhere tighten monetary policy.

It was unanimous, with all six Monetary Policy Board members at the meeting voting for the higher base rate.

The increase is second this year and the fourth in the current round of tightening, which began in August 2021.

Rates were taken from the all-time low of 0.50 percent to 0.75 percent in August. That was followed by an increase to 1.0 percent in November and another to 1.25 percent in January.

The base rate is now 1.50 percent.

"Since the monetary policy board meeting in February, there have been major changes that affected internal and external economic conditions for rates, like the Ukraine crisis," said Joo Sang-yong, acting board chief, at a press conference Thursday.

The central bank increased rates despite being temporarily leaderless. Former governor Lee Ju-yeol left office in March, and Rhee Chang-yong has yet to be confirmed.

"We had to respond even though the Bank of Korea governor role is currently vacant," Joo said.

The Bank of Korea has never before raised interest rates without a governor.

Joo brushed off concerns about stagflation.

"Inflation is currently high, but we believe the economic growth rate will be at least in the mid-to-high 2-percent range even if the growth rate declines slightly," Joo said.

Korea's consumer prices jumped 4.1 percent in March on year, the fastest pace in more than a decade. The central bank projects inflation to stay in the 4-percent range.

Inflation has been fueled by Russia's invasion of Ukraine, which has driven up the prices of raw materials and energy. Supply-chain disruptions, worsened by lockdowns in Shanghai, have also had an impact on prices.

The U.S. Federal Reserve's plan for aggressive rate increases will have a limited effect on Korea's economy because of its "favorable economic fundamentals," including a current account surplus and net external assets, Joo argued.

Korea's current account surplus in February was 6.42 billion dollars.

In a statement, the Bank of Korea did note the exchange rate. The won has weakened about 3 percent this year, putting upward pressure on the price of imported goods.

The central bank pledged to "appropriately adjust the easing of monetary policy in the future."

Its decision was made as the U.S. Federal Reserve indicates aggressive rate increases coming, with Fed Chairman Jerome Powell saying last month that short-term interest rates will be increased faster than expected, even if that means disrupting growth and hiring.

It upped the federal funds rate by 0.25 percentage points in March to a range of between 0.25 percent and 0.5 percent.

"We're going to be looking at evolving conditions, and if we do conclude that it would be appropriate to move more quickly to remove accommodation, then we'll do so," Powell said in March. "That's certainly a possibility as we go through the year."

The Bank of Korea's next monetary policy board meeting is scheduled to take place on May 26. The Federal Open Market Committee is holding its next meeting on May 3 and 4.

In a Reuters poll earlier this month, 83 percent of economists surveyed said that the U.S. monetary authorities will raise rates by 0.50 percentage points at the next rate-setting meeting.

Kim Ji-man, an analyst at Samsung Securities, projected in a report Thursday that Korea will bring the rate to 2.0 percent by the end of year. He forecast the next rate increase to happen in July and another in October.

"Since inflation pressure is not high compared to key countries, it is unlikely for the central bank to take a big step" of raising rates by more than a quarter percentage points at once, Kim added.

BY JIN MIN-JI [jin.minji@joongang.co.kr]