Korea: BOK hikes rates by 25 basis points in August
At its meeting on 25 August, the Bank of Korea (BOK) raised the base rate by 25 basis points to 2.50%, taking rates to five times where they were since the hiking cycle began in August last year. The decision matched market expectations.
The BOK said that the hike was necessary—as it did last month—to avoid “the entrenchment of high inflation” and to keep medium-run inflation expectations anchored to its 2.0% target. Price pressures have become broader based as the economy reopens from Covid-19, with core inflation increasing again in August to 4.0% (July: 3.9%). Moreover, the BOK markedly revised its inflation forecasts upwards for this year and next, and market inflation expectations for the year ahead have risen to 4.3% in August from 2.6% in January.
In its press release, as last month, the BOK continued with its hawkish forward guidance. It stated that further rate hikes were “warranted”, given that inflation is expected to run “substantially above the target level” going forward. As a result, the majority of our panelists expect further rate hikes this year. A key risk is a sharper-than-expected economic slowdown: The BOK lowered its growth forecasts for this year to 2.6% (May: 2.7%) and for next year to 2.1% (May: 2.4%).
Analysts at Morgan Stanley commented on the monetary policy outlook:
“We see BoK taking the policy rate to 2.75% in Oct-22, with the risk that it could go to 3.0% in Nov-22. However, we think rate hikes moving into restrictive territory in 2023 still looks unlikely.”
The next monetary policy meeting will be held on 12 October.