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Korea Monetary Policy August 2021

Korea: BoK hikes base rate in August

At its meeting on 26 August, the Bank of Korea (BoK) hiked the base rate by 25 basis points to 0.75%, in line with market expectations. However, the decision was not unanimous, with one of the board members voting against the hike. Notably, the move marked the first step toward policy normalization by a major Asian central bank.

The Bank’s decision to raise rates came amid strong economic conditions, despite a slowdown in private consumption, and a consistent rise in inflation. In addition, the public’s inflation expectations have risen above the Bank’s 2.0% target, and the Bank adjusted its inflation forecasts to slightly above 2.0% from 1.8% in May. Additionally, an acceleration in household loan growth and an increase in housing prices across the country gave the Bank further reason to tighten its stance.

In its press release, the BoK struck a deeply hawkish tone, noting that it sees inflation remaining above target for some time and that it “will gradually adjust the degree of monetary policy accommodation”. It also stated it will assess other monetary policy changes in major countries. The Bank suggested that the only risks to this outlook are new developments in the health crisis or changes to the pace of economic growth. Most of our panel sees the Bank keeping rates at 0.75% until year-end.

That said, some see an additional hike this year, including analysts at Goldman Sachs:

“Overall, we keep our baseline scenario that the BoK will follow up with another 25bp rate hike on 25 November, assuming that the coronavirus situation continues to stabilize. Key events and indicators to watch, other than regular activity, leverage and inflation data, include the pace of vaccination till end-October (full vaccination of 70% of population) and the pace and timing of Fed tapering.”

Meanwhile, analysts at ANZ do not expect another hike until next year:

“We have been of the view that a gradual and measured pace of policy normalization is the likely way forward for the BoK, as concerns over financial imbalances need to be balanced with the economic recovery, which is still facing material uncertainties. We are keeping our forecast for a total of three 25bp hikes in the current cycle, with the next move materialising in Q1 2022.“

The next monetary policy meeting will be held on 12 October.

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