BOK raises rate to pre-pandemic level, hints more rate hikes to come

South Korea’s central bank on Friday raised its base rate by 25 basis points to 1.25 percent, returning it to the level before the pandemic started, with its chief hinting at additional hikes.

As a result of its first rate-setting meeting of the year, the Bank of Korea’s monetary policy board delivered its third pandemic-era rate hike, following its previous 25 basis point rate hikes in August and November, respectively. The move in August ended more than a year of record-low interest rate of 0.5 percent, which the BOK had maintained to relieve pandemic woes.

Fridays’ rate hike put the benchmark rate back on the level of March 2020, before the BOK carried out rate cuts.

BOK Gov. Lee Ju-yeol hinted of more rate hikes in an online press briefing tied to Friday’s monetary policy meeting.

“The BOK’s perspective on whether the monetary policy is dovish or not depends on several factors including the current economic circumstances, the pace of growth and inflation,” Lee told reporters.

“Despite the rate hike today, we believe the monetary policy remains at a dovish level compared with the circumstances surrounding the real economy.”

Lee explained that the need to dispel risks stemming from financial imbalances was a reason behind Friday’s rate hike and that the current situation calls for “further adjustment of the base rate.”

Lee also warned of growing inflation here, considered a major catalyst behind the BOK’s recent series of rate hikes. BOK said in a statement released in English that the consumer price inflation has risen to the upper 3 percent level citing the “ongoing sharp rise in the prices of petroleum products and agricultural, livestock, and fisheries products.”

“Last year’s inflation grew 2.5 percent, and it is expected to grow higher this year.”

Korea’s consumer prices grew at the sharpest rate in a decade in 2021, compared with a 0.5 percent gain in 2020, according to Statistics Korea.

But Lee brushed off concerns of a possible stagflation, in which the inflation rate is high and the economic growth rate slows, pointing to Korea’s robust economic growth.

“South Korea’s economy expanded by 4 percent last year and this year’s forecast stands at 3 percent -- the faster-than-expected recovery means that we are not headed for stagflation,” the BOK chief explained.

On this year’s monetary policy, the US Federal Reserve’s pace of monetary tightening will work as a key factor in determining the BOK’s policy stance, according to Lee.

The US Federal Reserve has recently hinted of a sooner-than-expected timeline for tapering, monetary tightening and rate hikes, rattling the global market.

“To alleviate inflation risks, the BOK could carry out one more rate hike by the end of the year, wrapping up 2022 with a rate of 1.5 percent,” Oh Chang-seop, an analyst at Hyundai Motor Securities said.

“But if the ruling party candidate becomes elected in Korea’s upcoming presidential election or the US Fed’s pace of monetary policy normalization gains a faster pace, then the BOK’s rate could reach 1.75 percent in the cited period.”

By Jung Min-kyung (mkjung@heraldcorp.com)