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Bank of Korea raises rates and signals more to come

By Debabrata Das

07:33, 14 January 2022

By Debabrata Das

07:33, 14 January 2022

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Bank of Korea at night
– Photo: Shutterstock

With continuing strong economic data coming out of South Korea, the monetary policy board of the Bank of Korea raised the base rate by 25 basis points to 1.25%.

The central bank said that the global economy, as well as the local economy, has continued to recover despite the emergence of the Omicron variant of Covid-19.

“Labour market conditions have continued to improve, with a sustained trend of increase in the number of persons employed. Going forward, the economy is likely to sustain its sound growth, as the recovery of private consumption is forecast to pick up again while exports are expected to continue their solid trend of increase,” the Bank of Korea said in a statement on Friday explaining its decision.

More rate hikes on the anvil

According to experts this might not be the end of the rate hike cycle as the central bank continues to sound hawkish in its outlook for both global and local economy.

“The Bank of Korea (BOK) has a reputation for being hawkish, and they have lived up to that today. Even today's decision was controversial. South Korea has been weathering a new Covid-19 wave and this and the resulting movement restrictions on the population led to a spike in the December unemployment rate that could easily have been used as an excuse to pause at this meeting, and resume hiking later,” said Robert Carnell, regional head of research for Asia-Pacific at ING Bank in a note.

He added that one of the reasons that the rate was increased today is that BOK Governor Lee Ju-yeol will be stepping down after the next meeting in March, followed by presidential elections which means the central bank will be without a governor for some months after March.

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BOK remains hawkish

According to Carnell, this may lead to another rate hike in the March monetary policy meeting, Lee’s last as BOK governor.

ANZ Research’s economist Krystal Tan was also of the opinion that another rate hike this year seems likely from the BOK’s hawkish signals. However, Tan rules out a back-to-back rate hike.

“The central bank’s policy messaging today, coupled with the government’s announcement that a supplementary budget is in the pipeline, signals that the rate-hiking cycle has more room to run. We are now pencilling in a 25bp rate hike in the second quarter. Another back-to-back hike is unlikely, as the BoK has indicated a desire to observe the effects of the hikes made so far,” Tan said in a note.

Policy still accommodative

According to Tan, in a meeting with Korean media after the decision was announced, Governor Lee also made it clear that with base rate at 1.25% the monetary policy was still accommodative and even a rise to 1.50% will not constitute tightening.

Read more: Employment grows at fastest pace in South Korea since 2013

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