Korea: BOK hikes by 25 basis points in May
At its meeting on 26 May, the Bank of Korea (BOK) raised the base rate by 25 basis points to 1.75%. The decision matched market expectations.
Rhee Chang-yong, the new governor, said at a press briefing after the decision that the Bank had needed to make a “pre-emptive response” to rising inflation. Rising commodity prices have driven inflation in recent months further above the BOK’s 2.0% target, which has since contributed to higher core inflation and inflation expectations. This, in turn, could lead to second-round effects, where prices and wages push each other up in a vicious cycle. The Bank substantially raised its inflation forecasts. It now expects inflation to be 4.5% this year and 2.9% next year instead of 3.1% and 2.0% as previously forecast. As a result, the Bank felt compelled to raise rates in order to bring inflation to target in the medium term.
In its press release, the BOK adopted a more hawkish forward guidance. It stated that it is “warranted to conduct monetary policy with more emphasis on inflation for some time”, with the governor stating that the market’s view that rates will reach 2.50% by the end of the year was reasonable. As a result, almost all of our panelists expect further rate hikes this year, with most expecting two more 25 basis point hikes this year.
Analysts at Goldman Sachs do not forsee a sharp tightening of monetary policy ahead:
“We see the BOK hiking 25 basis points in consecutive meetings, taking policy rate to 2.50% by Q4 2022 […]. Based on our CPI forecasts, we expect the real policy rate to average near the 0.00%-level in 2023. This is likely around Korea’s neutral real policy rate range, which we estimate at 0.00–0.50%. Our view that Korea is still likely running a negative output gap and not in overheated territory is why we do not think lifting real rates into restrictive territory is likely. We continue to characterise the cycle as policy rate normalisation rather than aggressive rate tightening.”
The next monetary policy meeting will be held on 13 July.