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Korea Monetary Policy November 2022

Korea: BOK hikes rates by 25 basis points in November

At its meeting on 24 November, the Bank of Korea (BOK) raised the base rate by 25 basis points to 3.25%. The decision matched market expectations and was unanimous. The hike was smaller than the previous 50 basis point hike made in October.

The smaller hike in November was driven by a desire to balance two competing sets of objectives. On the one hand, the BOK stated that tightening was needed to bring down inflation, which remained above target in October. On the other hand, the BOK stated that a smaller hike than in the past meeting was warranted given recent instability in domestic financial markets, a slowing economy and the easing of exchange rate risks.

Meanwhile, the BOK revised its forecast for GDP growth next year to 1.7% (previous: 2.1%) and its forecast for inflation next year to 3.6% (previous: 3.7%).

In its press release, the BOK stated that further rate hikes were “warranted for some time”, given that inflation is expected to run “substantially above the target level” going forward. Most panelists expect the BOK to complete its hiking cycle in Q1. Key risks to the monetary policy outlook are the Feds 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 13 January.

Analysts at Nomura expect the final hike to take place at the BOKs next meeting in January:

“The November meeting has marked a shift in the BOKs policy reaction function towards domestic conditions, as money markets remain under high stress despite the announcement of a liquidity program. It supports our view that growing concerns over financial stability will limit the BOKs hawkish stance […]. We reiterate our view that the BOK will deliver a final 25bp hike in January to a terminal rate of 3.5%, consistent with the median estimate of the MPC.”

INGs Min Joo Kang, meanwhile, expects the final hike to take place in February:

“We are maintaining our call for a 25bp increase in 1Q23, and now see a better chance of a rate hike in February rather than January unless the Fed surprises the market with another large step in December.”

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