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South Korea interest rate rise: Bank of Korea mulling more hikes as inflation picks up

By Mensholong Lepcha

Edited by Jekaterina Drozdovica

10:07, 6 September 2022

The Bank of Korea building, Seoul.
Bank of Korea to hike rates despite recession concerns – Photo: Shutterstock, Jonathan 21

South Korea’s interest rate is expected to keep rising until the end of the year as the Asian nation navigates through a tricky period of inflationary pressures and recession concerns.

The Bank of Korea (BOK) was among the first major central banks to start hiking rates as early as August 2021. Since then, the depreciation of the South Korean won (KRW) to a decade-low against the US dollar (USD), a growing trade deficit and economic slowdown have added to the bank’s challenges. 

Analysts predict that the BOK could end its rate hike cycle at the year’s final monetary policy meeting in November 2022, as economic growth concerns become the focus of monetary policy decisions.

What does the future hold for South Korea interest rates? Here, we take a look at the latest economic news and the South Korea interest rate forecast for 2022 and beyond. 

About: Bank of Korea

The Bank of Korea (BOK) is the central bank of South Korea. It’s responsible for issuing banknotes and national currency, implementing monetary and credit policy, managing foreign exchange reserves and supervising financial institutions. 

Chang Yong is the current BOK governor and chairman of its monetary policy board. His tenure is set to end in April 2026.

The BOK has adopted an inflation targeting monetary policy regime that aims to keep inflation at a target rate of 2% over a mid-term. The bank’s monetary policy board meets eight times a year.

In June 2020, the central bank published its BOK Mid- and Long-term Strategic Plan, a 10-year vision to review and improve the current monetary policy framework in order to keep up with changes in the financial and economic environment in the post-Covid-19 era.

The BOK said it will undertake a research-driven and technological-focused approach to tackle major challenges in South Korea, such as low fertility rates, population ageing, climate change and digital innovation.

The central bank added that it will establish a high-level research committee, and set up a team to conduct research on artificial intelligence, big data and blockchain to “actively engage” with digital innovation. It will establish a new office of digital innovation led by a chief digital strategy.

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South Korean interest rate history: Unprecedented 50 bps hike 

The benchmark  South Korea interest rate has trended downwards since 2008. Interest rates stood at 5.25% in August 2008, and were cut to 1.25% by June 2016. In 2020, the BOK lowered base rates to an all-time low 0.5% in order to support the South Korean economy during the heights of the Covid-19 pandemic.

The BOK was one of the first major central banks to embark on a monetary tightening cycle. South Korea raised interest rates as early as August 2021. In comparison, the US Federal Reserve (Fed) started raising rates in March 2022.

The BOK conducted two South Korea interest rate rises in 2021 to take rates from 0.5% to 1% by the end of the year. The central bank then implemented five South Korea interest rate hikes in 2022, including a first ever 50 basis points (bps) Bank of Korea interest rate hike in July 2022. As of 5 September 2022, South Korea’s interest rate stood at 2.5%.

Bank of Korea interest rate, 2000 - 2022

Inflation peaks but economic growth outlook remains bleak

When attempting to make a South Korea interest rate prediction, the monthly inflation data is one of the most important metrics to study.

The latest monthly consumer price index (CPI) figure showed headline inflation eased 0.1% in August 2022 on the preceding month, driven by a fall in transportation costs. On an annual basis, headline inflation rose 5.7% year-on-year (yoy) in August, compared to 6.3% yoy in July.

Policymakers will see the recent dip in oil prices to levels below $100 per barrel as a positive sign against raging inflation. There is a growing narrative that the worst of inflationary pressure may be over.

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“Korea's headline inflation appears to have passed its peak but will likely stay above 5% for the rest of the year. The Bank of Korea will take some comfort from these latest inflation figures but will stay on a hiking path through to the year-end,” said Min Joo Kong, senior economist at ING.

Yet, concerns about rising food prices remain. In August, food and non-alcoholic beverages saw the sharpest increase in prices among all items.

Another growing worry for the Bank of Korea is the prolonged depreciation of the South Korean won against the US dollar. The South Korean currency is among the worst performing in Asia, having fallen over 11% year-to-date. On 5 September 2022, the USD/KRW was trading at about 1360 – the highest in over 12 years. 

USD/KRW is trading at the highest level in over 12 years

A slowdown in economic growth across major economies, including the US and China, has resulted in a fall in South Korean exports, which is hurting its currency in 2022. According to investment bank Nomura, South Korea was expected to record its first trade deficit in over 10 years in July 2022.

“A downturn in the tech cycle bodes poorly for South Korea’s export sector. Tech exports account for a third of its goods exports, and of which, semiconductors comprise almost two-thirds,” said Krystal Tan, economist at ANZ Research.

A preliminary second quarter (Q2) gross national income report published on 1 September showed that exports fell 3.1% in Q2, from the preceding quarter. In a separate report, the BOK projected real gross domestic product (GDP) to grow 2.6% in 2022 and 2.1% by 2023.

“Despite these growth headwinds, the BoK has little scope to pivot as long as inflation remains well above its 2% target and if the US Fed stays hawkish,” Tan added with regards to South Korean interest rates. 
“The BoK has made clear inflation remains its top priority for now, warning that unanchored inflation expectations will lower real incomes and cause financial instability.”

Two more monetary policy meetings are scheduled before the end of the year. The BOK’s monetary policy board is set to meet on 12 October and 24 November.

South Korean interest rate outlook for 2022 and beyond

As of 5 September, the BOK was widely expected to continue with South Korea interest rate hikes for the rest of 2022.

In its South Korea interest rate forecast, ANZ Research projected the BOK to hike rates by 25 bps at each of its remaining policy meetings, taking the rate to 3%.

Nomura also saw the BOK hiking rates by 25 bps in October. However, economists at Nomura and ANZ Research differed in their outlook post the October meeting.

Nomura said South Korea could go into recession in the third quarter of 2022, which could end the BOK’s rate hike cycle at an interest rate of 2.75%.

ANZ Research economists saw the BOK taking rates to 3% by the end of the year, followed by a ”prolonged pause” in 2023. Calls for a rate cut, on the other hand, seemed premature at this juncture, with Tan of ANZ Research adding:

“But by the same token, the hurdle for a rate cut is high unless the US Fed pivots or South Korea’s terms of trade improves and materially eases pressure on its balance of payments position. As things stand, our US analyst does not anticipate rate cuts by the US Fed until 2024.”

ING said the BOK will continue to stay on a hiking path “at least until the end of the year”, with a 25 bps hike expected in October. 

“However, as we get closer to the year-end, we will see clearer signs of a slowdown in growth, so the BOK could begin to give more weight to growth considerations in its policy decision,” said Min, who expected the central bank to end its hiking cycle at 3% in November.

Elsewhere, data firm Trading Economics projected interest rates at 3.25% in 2023 in its South Korea interest rate prediction.

Note that South Korean interest rate forecasts from analysts can be wrong. Economic predictions should not be used as a substitute for your own research.

Always conduct your own due diligence and remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and trading goals. Never trade more than you can afford to lose.

FAQs

What are the interest rates in South Korea?

As of 5 September 2022, the base rate in South Korea stood at 2.5%.

Will interest rates go up in South Korea?

Analysts expected the BOK to hike rates by 25 bps in October, taking rates to 2.75%. Remember, their predictions can be wrong.

How high will interest rates go in South Korea?

ANZ Research expected the BOK to hike rates by 25 bps at each of its remaining two policy meetings in 2022 to take rates to 3%. Remember, analyst forecasts can be wrong.

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