BOK raises interest rates to 1% due to inflation concerns

South Korea’s central bank on Thursday raised its benchmark interest rate by 25 basis points and returned to the 1% interest rate range after 20 months, while upgrading this year’s inflation target.

In a largely expected move, the Bank of Korea implemented an interest rate hike as a result of the last monetary policy meeting of the year. The central bank stood with a clap on its base rate at the previous interest rate meeting last month after implementing a 25 basis point rate hike to 0.75 per cent in August. The move in August ended more than a year of ultra-low interest rates amid the COVID-19 pandemic.

BOK mentioned the steady pace of recovery in Asia’s fourth largest economy backed by solid vaccination operations and strong exports. Korea’s outbound shipments rose 24 percent year-on-year in October to $ 55.55 billion, government data showed.

The government adopted earlier this month its gradual return to normal in the “live with COVID-19” scheme, and 79.3 percent of the total 51 million Korean people had been fully vaccinated by early Thursday.

The nation’s economy is expected to reach its annual target of 4 percent this year, BOK noted. But while the overall economic outlook remained rosy, the BOK expressed stronger concerns about growing inflationary pressures and raised its inflation target for this year and next. It raised this year’s inflation target by 0.2 percentage points to 2.3 per cent and next year’s corresponding figure by 0.5 percentage points to 1.5 per cent.

In October, South Korea’s consumer prices rose 3.2 percent in October last year, the sharpest increase of the year in nearly a decade, according to government data.

BOK Governor Lee Ju-yeol mentioned the ongoing global bottleneck in supply and rising oil prices behind rising consumer prices.

“The current path to recovery involves an unprecedented global bottleneck, which has curtailed related activities and led to inflation,” Lee said in a press briefing ahead of Thursday’s rate hike.

Lee also strongly hinted at yet another rate hike within the first three months of 2022, saying he believes the current level of the benchmark rate remains dove.

“While it depends on the economic circumstances of the first quarter of next year, it will not be necessary to rule out an interest rate hike in that period,” Lee said.

“There are several ways to determine if the current rate is pigeon-like or not, but if related data and indices are taken into account, the current rate level can be seen as pigeon-like.”

Lee also addressed the existing concerns of another rate hike scenario as Lee approaches the end of his term as central bank governor and the next presidential election, which takes place in March.

“There was concern that an interest rate hike would not be implemented at the next interest rate meeting scheduled for February, but the Monetary Policy Council shares the belief that decision-making should focus more on economic rather than political issues,” the BOK chief explained.

BOK’s latest interest rate hike is expected to slow the country’s snowball debt, which had been spurred by record low interest rates and lending rates. According to the BOK, household credit reached a record high of 1.844.9 trillion won ($ 1.58 trillion) at the end of September, an increase of 36.7 trillion won from the previous quarter.

By Jung Min-kyung ([email protected])

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