Rates upped by a quarter point taking base rate to 2.50 percent
Bank of Korea Governor Rhee Chang-yong speaks at a press conference held in central Seoul on Thursday following the Monetary Policy Board held earlier in the day.
The Bank of Korea raised the base interest rate by a 25 basis points to 2.50 percent on Thursday.
The Monetary Policy Board made the decision unanimously just a month after the board raised the rate by a historic 50 basis points in July.
It is the seventh rate increase in the current round of monetary tightening, which began in August last year, and an unprecedented fourth consecutive increase.
“A continued rate increase is necessary to deter the spread of the inflation expectations,” Gov. Rhee Chang-yong said at a press conference held in central Seoul on Thursday. He added that inflation will remain high through early next year.
The board “thinks it should conduct monetary policy centered on inflation for the time being,” he said.
Inflation is projected to reach around 5.9 in the second half of the year, the central banker said.
The bank upped the inflation forecast for 2022 to 5.2 percent, the highest since 1998, from the previous 4.5 percent and revised down Korea’s annual GDP forecast to 2.6 percent from the previous 2.7 percent.
Korea's central bank is in a difficult position as the won weakens and the property market teeters. If it is too dovish, the currency could further weaken and inflation could remain high. If it is too hawkish, bankruptcies could increase and the economy could slow dramatically.
Thursday's rate increase was forecast by many analysts, as the central banker works to battle high inflation, which hit 6.3 percent in July. That was the highest since November 1998.
The rate increase has put Korea's base interest rate on par with the U.S. Federal Reserve's fed-funds rate, which was increased by 75 basis points in July to a target range of 2.25 to 2.5 percent.
Rhee said the market projection of the rate standing between 2.75 to 3 percent in the year-end is “still reasonable.”
“The rate is projected to reach 3.0 percent by the end of the year,” said Lee Seung-hoon, an analyst at the Meritz Securities. He added the bank is not likely to up the rate by more than 25 basis points at once.
“The current inflation is caused by a rise in import prices, so there’s no need for the Bank of Korea to raise the rate as aggressively as the Fed, where inflation is caused by strong demand. But the Bank of Korea should up the rate to discourage inflation expectations.”
High inflation expectations could encourage companies to raise prices as they anticipate raw material prices to increase, said Lee Hwan-seok, Deputy Governor at the Bank of Korea on Thursday.
Korea’s inflation expectations hit their highest in 20 years to 4.7 percent in July. The figure went down to 4.3 percent in August.
Two more Monetary Policy Board meetings are left this year. The next meeting is scheduled to take place on October 12.
The next two-day U.S. Federal Open Market Committee meeting will take place from September 20. Two more meetings will be held this year, in November and December.
Fed Chairman Jerome Powell is scheduled to speak at the annual three-day Economic Policy Symposium in Jackson Hole starting on Aug. 25.
Rhee will also attend. Its theme will be Reassessing Constraints on the Economy and Policy.
BY JIN MIN-JI [jin.minji@joongang.co.kr]
with the Korea JoongAng Daily
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