BOK raises rate to 1% amid inflation concerns

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

In a largely expected move, the Bank of Korea carried out a rate hike as a result of the last monetary policy meeting of the year. The central bank stood pat on its base rate in the previous rate-setting meeting last month, after carrying out a rate hike of 25 basis points to 0.75 percent in August. The move in August ended more than a year of ultralow interest rates amid the COVID-19 pandemic.

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

The government early this month adopted its phased return to normal in the “living with COVID-19” scheme, and 79.3 percent of the total 51 million Korean population had been fully vaccinated as of early Thursday.

The nation’s economy is projected to meet its annual goal of 4 percent this year, the BOK noted. But while the overall economic outlook remained rosy, the BOK expressed stronger concerns of growing inflationary pressure, raising its inflation target for this year and next year. It raised this year’s inflation target by 0.2 percentage point to 2.3 percent and next year’s corresponding figure by 0.5 percentage point to 1.5 percent.

In October, South Korea’s consumer prices gained 3.2 percent in October on-year, marking the sharpest on-year gain in nearly a decade, according to government data.

BOK Gov. Lee Ju-yeol cited the ongoing global supply bottleneck and surging oil prices behind the rising consumer prices.

“The current road to recovery involves an unprecedented global supply bottleneck, which has been limiting the related activities and has been fueling inflation,” Lee said in a press briefing tied to Thursday’s rate-setting meeting.

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

“While it depends on the economic circumstances in the first quarter of next year, it won’t be necessary to rule out a rate hike in the cited period,” Lee said.

“There are several ways to determine whether the current rate is dovish or not, but taking in related data and indexes into account, the current level of rate could be seen as dovish.”

Lee also addressed the existing concerns of another rate hike scenario as Lee nears the end of his term as the central bank chief and the next presidential election to take place in March.

“There were concerns that a rate hike won’t be able to be carried out in the next rate-setting meeting scheduled in February, but the monetary policy board shares the belief that the decision-making should be focused more on economic circumstances rather than political ones,” the BOK chief explained.

The BOK’s latest rate hike is projected to curb the nation’s snowballing household debt, which had been spurred by record-low interest and lending rates. According to the BOK, household credit hit a record high of 1,844.9 trillion won ($1.58 trillion) as of end-September, up 36.7 trillion won from the previous quarter.

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