Korea: BOK hikes rates by 25 basis points again in January
At its meeting on 13 January, the Bank of Korea (BOK) raised the base rate by 25 basis points to 3.50%. The decision matched market expectations, but it was not unanimous: Two of the monetary policy committee’s seven members voted for rates to remain unchanged.
Inflation and inflation expectations remained above target in December, pushing the BOK to hike. That said, both inflation and inflation expectations have moderated in recent months, likely explaining the BOK’s decision to go with an incremental 25 basis point rise and why the decision to hike was not unanimous.
Meanwhile, the BOK said it would likely revise downward its 1.7% forecast for GDP growth this year. However, it kept its forecast for inflation this year unchanged at 3.6%.
In its press release, the BOK kept the door open to future rate hikes, depending on the evolution of inflation and GDP. 12 of the panelists polled by FocusEconomics do not expect further rate rises ahead, while the other five expect no more than 25 basis points of additional hikes by the end of the year. Our panel expects the BOK to reduce the policy rate by 25 basis points in H2.
Key risks to the monetary policy outlook are the Fed’s stance, the evolution of the won, continued instability in domestic financial markets and a sharper-than-expected economic slowdown.
The next BOK meeting is scheduled for 23 February.
Analysts at ANZ said:
“For our part, we remain of the view that the BOK’s rate hiking cycle has come to a close amid a broadening growth slowdown, moderating inflation expectations and an improving outlook for South Korea’s balance of payments.”
Analysts at the EIU said:
“We believe that the BOK will end its current monetary policy tightening cycle in February, as the domestic inflationary picture continues to improve. This will also reduce the downside pressures on South Korea’s economy, which is slowing amid weakening external demand. If headline inflation stays above 4.5% throughout the first quarter, the central bank may opt for one more 25-basis-point rate increase. However, we attach a low risk to this occurring.”