South Korea delivers 25bp rate hike to combat inflation

By Thomson Reuters Aug 24, 2022 | 8:09 PM

By Cynthia Kim and Joori Roh

SEOUL (Reuters) -South Korea’s central bank raised its key interest rate by a quarter-percentage point as expected on Thursday, in a bid to contain inflation and prevent capital outflows as the U.S. Federal Reserve gears up for more hikes.

The Bank of Korea raised its benchmark policy rate by 25 basis points to 2.50%, resuming normal-sized increments after delivering an unprecedented 50-basis point hike in July to curb inflation now at an almost 24-year high.

All but one of 36 analysts in a Reuters poll expected the bank to go for the quarter-point hike, while one expected a half-point hike.

The bank also upgraded this year’s inflation forecast to 5.2% from 4.5%, which would be the fastest rate since 1998, and cut its projections for economic growth to 2.6% this year from 2.7% previously.

It sees growth slowing to 2.1% in 2023.

September futures on three-year treasury bonds extended losses after the announcement, falling as much as 0.25 point to 104.41.

The BOK was among the first central banks to abandon pandemic-era monetary stimulus and has hiked a total of two full percentage points since August last year.

South Korean policymakers are now trying to rein in the fastest inflation in over two decades without cratering the economy.

“With economic growth set to slow in the second half of the year and inflation probably already having peaked, we think the tightening cycle will come to an end later this year,” said Gareth Leather, an economist at Capital Economics in a note published shortly after the rate decision.

“Weaker economic growth – caused by the slowdown in the global economy and the drag from recent policy tightening – should cause underlying price pressures to subside.”

Economists were divided on where rates would be by the year-end. Among the 36 surveyed, 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.

Governor Rhee Chang-yong will hold a news conference at 0210 GMT.

(Additional reporting by Choonsik Yoo, Jihoon Lee; Editing by Sam Holmes)