Bank of Korea ups rates a quarter point citing high inflation
It was a unanimous decision by the monetary policy board and came in the context of fast rising consumer prices.
"Inflation was higher than we had expected," Bank of Korea Gov. Rhee Chang-yong said during a press conference held in central Seoul on Thursday.
The increase, which was widely expected, is the second consecutive rate rise and the fifth in the current round of monetary tightening, which began in August last year. At the previous board meeting, in April, rates were also upped 25 basis points and the decision was also unanimous.
"The board will guide monetary policies focused on inflation for the time being," the governor said, adding that inflation may top 5 percent in May.
At a press conference held last month, Rhee said that he is more concerned about inflation than slow growth.
The central bank forecasts full-year inflation to come in at 4.5 percent this year, which would be the highest rate since 2008, when inflation hit 4.7 percent. It is forecasting 2.9 percent in 2023.
"Currently available information suggests that inflationary pressures have remained high, while the recovery of the global economy has moderated, affected by the Ukraine crisis and lockdown measures in China," the central bank said in a statement. "The board sees global economic growth and global financial markets as likely to be affected by global inflation, monetary policy changes in major countries, geopolitical risks and Covid-19 restrictions in major countries."
A hawkish U.S. Federal Reserve is also pressuring the Bank of Korea.
The Fed voted to raise rates by 50 basis points earlier this month. It is forecast to raise rate by another 50 basis points in June and again in July, followed by 25-basis-point increases in September, November and December, according to Lim Jae-kyun, an analyst at KB Securities.
That will place the U.S. rate at 2.75 percent at the year end.
"The board will continue to conduct monetary policy in order to sustain the recovery of economic growth and stabilize consumer price inflation at the target level over a medium-term, while paying attention to financial stability," the bank's statement said.
On the same day, the central bank projected Korea's GDP to reach 2.7 percent this year, down 0.3 percentage points from the previous 3 percent projection made in February. It is forecasting 2.4 percent next year, down 0.1 percentage points from the previous projection.
"Private consumption is expected to continue to recover with the support of improved income conditions and eased social distancing measures," the bank said.
It said growth in construction may slow as material prices rise.
BY JIN MIN-JI [firstname.lastname@example.org]