Korea: BoK hikes rate in late November amid surging house prices and high household debt
At its meeting on 25 November, the Bank of Korea (BoK) resumed its tightening cycle, hiking the base rate by 25 basis points to 1.00%, after deciding to hold fire in October.
The Bank’s decision was broadly due to a combination of favorable economic conditions and rising inflation expectations. The Board stated that inflation will remain above the 2.0% target in the near term, and will exceed the path first projected in August. Meanwhile, house prices have continued to rise rapidly throughout the country, while household loans have remained high. Notably, producer prices, which can be a precursor to consumer prices, have been rising at consistently higher rates throughout this year, with growth reaching 8.9% year-on-year in October.
The Bank kept its cautious tone in its forward guidance, vowing to support the economic recovery while also trying to ensure price stability, as well as manage Covid-19-related risks and financial market imbalances. Most of our panelists see at least one more rate hike by end-2022.
Analysts at Goldman Sachs commented on the outlook for next year:
“In our baseline scenario, the first hike next year will take place most likely in the 14 April meeting, between the presidential election of 9 March and the start of a new administration on 9 May. It is quite possible that the April MPC meeting could take place in the absence of a new BoK leadership, unless the nomination process starts soon, supported by expeditious handling of parliamentarian hearings; this might not be realistic given overriding heavy political schedules in a run-up to the presidential election.”
The next decision on monetary policy will take place on 14 January.