BOK hints of further lifting after rate hike to 1.75%, eying annual inflation at 14 yr high

[Source: Pool Photo]

(Updated with governor comments, additional information)

South Korea’s central bank will go on raising interest rates as it sees inflation flying above 5 percent in May and next few months to finish the year at a 14-year high of 4.5 percent, according to its new chief Thursday.

The Bank of Korea (BOK) governor Rhee Chang-yong chairing his first monetary policy meeting endorsed a hike of 25 basis points to place Korea’s policy rate at the highest since November 2018. Korea’s overnight call rate has been yanked up through five increases from the record low of 0.5 percent kept since the outbreak of Covid-19 in May 2020 until last August.

“The board was unanimous on the (back-to-back and this year’s third) hike,” Rhee said, adding that monetary policy for coming months would prioritize on containing consumer prices.

He hinted the on-year consumer price gain this month would hit above 5 percent and stay in the level for some time. Inflation will stay high next year as well in 4 to 3 percent range to run faster than the economic growth on increased demand added to supply-end pressure from revived consumer spending and large-scale corporate investment, he said.

Korea’s top business groups so far this week announced spending plans of 945 trillion won through 2026, or 186 trillion won on average per year.

The BOK in revised economic outlook on Thursday projected an annual inflation rate of 4.5 percent, which would be the highest in 14 years and sharply raised from 3.1 percent estimated in February. It downgraded the growth outlook to 2.7 percent 3.0 percent.

Rhee assessed inflation posed greater danger than slowed growth. “We should be more worried about upward inflationary pressure than the risk of stagflation (low growth accompanied by high inflation),” he said.

Asked if the BOK would raise the rate to 2.25 to 2.50 percent as market expects, he said such expectations were “reasonable” in line with the upward revision in inflation estimate.

Although normalization has been forewarned, the BOK’s tightening pace and scope accelerated in line with faster-than-expected gains in inflation and tightening actions by the U.S. Federal Reserve.

Inflation and expected inflation rate have been hovering at the highs during the wake of the global financial crisis as supply bottleneck from pandemic was aggravated by Russia’s war with Ukraine.

Consumer prices rose 4.8 percent in April, and consumers’ expected inflation for the following year surpassed 3 percent. The Korean won is at its weakest since 2009 against the U.S. dollar, making import costs pricier on top of soaring international grain and fuel prices that have translated into higher prices across the board from shelf goods to service charges.

Given the instability in food and fuel prices due to the protracted Russian aggression of Ukraine, strong prices will likely plague the country and the world throughout the year.

[Source: Bank of Korea]

The U.S. Fed is expected to deliver two more big steps, or rate increases by 50 basis points, in June and July, which would place the U.S. interest rates above Korea’s and further accelerate foreign capital flight from Korea markets.

The new Yoon Suk-yeol government has packaged a record-sized 60 trillion won supplementary budget, which could also add to inflationary pressure.

Rhee told reporters that the extra budget will add 0.2-0.3 percentage point to economic growth and 0.1 percentage point to inflation.

The country at the same time is faced with an extraordinary condition of twin deficits in fiscal and trade balance due to increased spending and faster rise in imports that would slow economic growth for this year.

Slowed economy could restrain the BOK in matching U.S. steps.

Bond prices, which move opposite to yields, fell Thursday upon the hawkish tone from the new governor.

The yield on three-year government bonds added 3.8 basis points to 2.984 percent and 5- and 10-year notes gained 4.1 basis points to 3.154 and 3.233 percent, respectively, by midday.

The U.S. dollar fell 4.4 won to 1,266.6 won, key stock indices were mostly flat.

The BOK has four more rate-setting meetings left this year, with the next held on July 13.

[ㄏ Maeil Business Newspaper & mk.co.kr, All rights reserved]