Bank of Korea (BOK) Governor Rhee Chang-yong and other policymakers unanimously decided to raise the benchmark seven-day repo rate by 25 basis points to 3.25 percent, marking the sixth consecutive rate hike for the first time.
The BOK started its tightening monetary policy in August last year, raising the benchmark rate by 25 basis points in April, May and August and by 50 basis points in July and October, respectively.
Thursday’s rise was in line with market expectations. According to a Korea Investment Financial Association survey of 100 fixed-income experts, 70 percent forecast a 25 basis point rate hike this month.
The survey showed that 29 percent of respondents expected a 50 basis point rate increase.
The BOK has been under pressure to counter still-high inflation, which has hovered at nearly triple the bank’s medium-term inflation target of 2 percent.
The country’s consumer price inflation has accelerated this year from 3.6 percent in January, 4.1 percent in March, 5.4 percent in May and 6.3 percent in July every year. one, before declining to 5.7 percent in August and 5.7 percent in October.
Inflation expectations, which measure the outlook among consumers for headline inflation for the next 12 months, stood at 4.2 percent in November after hitting a record high of 4.7 percent in July.
The BOK said in a statement after the rate-setting meeting that the policy to ensure price stability should continue as inflation remains high.
The central bank noted that the size of the rate hike was appropriate at 25 basis points considering overall declining risks in the foreign exchange sector and contraction in financial markets in the short term, while an economic slowdown greater than expected was expected. before. forecast.
Rapid rate hikes by the US Federal Reserve put the BOK on alert as a delayed response may force foreign funds out of the South Korean financial market and reduce the value of the Korean currency South against the US dollar.
The depreciation of the local currency would increase energy import costs, putting additional inflationary pressures on the country’s economy.
The Fed took a giant step forward for the fourth time in a row earlier this month by raising its policy rate by 0.75 percentage point to a range of 3.75 to 4.00 percent, raising its benchmark rate above the South Korea policy rate.
Expectations were high for the Fed to further tighten its monetary policy stance later this year to control inflation.
Market watchers forecast the BOK to hike rates further next year, setting its target interest rate at 3.50 to 3.75 percent in the first half.
The BOK said continued rate hikes were justified for some time as inflation was expected to remain high, substantially above the target level, even though the rate of domestic economic growth has slowed.
Concerns about an economic downturn have also increased, as higher borrowing costs would increase the debt service burden for households, which have suffered from record debt.
Domestic credit, which includes household debt to banks and other lenders as well as purchases on credit, reached a record 1,870.6 trillion won (1.38 trillion US dollars) at the end of September, an increase 2.2 trillion won ($1.6 billion) from three months earlier.
The rising debt service burden was expected to weigh on private consumption, while high inflation could reduce real household income. ■
This photo taken on November 24, 2022 shows the signs of a money changer at the Myeongdong shopping area in Seoul, South Korea. South Korea’s central bank raised its benchmark rate on Thursday to curb inflation, achieving six consecutive rate hikes for the first time. (/Wang Yiliang)
This photo taken on November 24, 2022 shows people shopping at the Myeongdong shopping area in Seoul, South Korea. South Korea’s central bank raised its benchmark rate on Thursday to curb inflation, achieving six consecutive rate hikes for the first time. (/Wang Yiliang)
This photo taken on November 24, 2022 shows the Bank of Korea (BOK) building in Seoul, South Korea. South Korea’s central bank raised its benchmark rate on Thursday to curb inflation, achieving six consecutive rate hikes for the first time. (/Wang Yiliang)
Signs of money changers are seen at the Myeongdong shopping area in Seoul, South Korea, on November 24, 2022. South Korea’s central bank on Thursday raised its policy rate to curb inflation, delivering six consecutive rate hikes for the first time. weather. (/Wang Yiliang)