Inflation outlook highest in 9 years ahead of rate hike

South Korean households’ outlook for inflation in the next 12 months rose this month to the highest level in nine years and seven months, according to a Bank of Korea survey released Tuesday ahead of its rate decision Thursday.

Survey respondents forecast inflation to average 3.3 percent, up from the previous record high of 3.1 percent in April.

In a monthly survey of 2,500 households conducted May 10-17, the BOK said consumers have braced for higher borrowing costs ahead, with the index jumping to 146 from 141 in April. A reading greater than 100 means people bet more on a rate hike than a cut.

“Households are already pricing in a rate hike by an increasingly hawkish BOK because prices keep soaring with no immediate signs of easing,” an official at the BOK said.

The consumer sentiment index fell to 102.6 from 103.8 in April, marking its lowest level since August last year, though households were found to be still optimistic about the future, as the reading stood above the 100 mark separating optimism and pessimism.

The central bank has raised interest rates by one percentage point, or 100 basis points, in four stages since August last year from the record low of 0.5 percent to tame inflation. It is expected to back a hike of 25 basis points this week, as Asia’s fourth-largest economy fights persistent inflation.

At its policy board meeting Thursday, the central bank is expected to lift the rate to 1.75 percent, according to eight out of nine economists polled by The Korea Herald.

The BOK usually changes its rate in 25-basis-point increments, a precedent that will follow this week as well, according to those predicting a moderate hike. BOK Gov. Rhee Chang-yong had recently backed the possibility of a “big” 50-basis-point raise, fueling speculation over a shift in the practice.

“The BOK would go for such a hike perhaps in July, after looking at inflation in May and June. We can’t rule out the possibility that inflation could ease or at least show signs of easing by that time,” said Joo Won, deputy director at Hyundai Research Institute.

But the one economist out of nine who forecast the big raise said increasing food prices, led by a surge in meat prices, are weighing on household spending. The surge is testing the central bank’s tolerance for red-hot inflation seeping into the economy, the economist said.

Consumer prices rose by a faster-than-expected 4.8 percent year-on-year in April, standing well above the central bank’s 2 percent target for the 13th month straight. The rising cost of energy and raw materials and a global supply chain crisis have markedly decelerated growth.

By Choi Si-young (siyoungchoi@heraldcorp.com)