Korea: BOK hikes rates by 50 basis points in October
At its meeting on 12 October, the Bank of Korea (BOK) raised the base rate by 50 basis points to 3.00%, taking rates 250 basis points above where they were when the hiking cycle began in August last year. The decision matched market expectations but was not unanimous: Two members dissented and voted for a 25 basis point hike.
In explaining its decision, the BOK highlighted the recent weakness of the won. The currency is down nearly 17% year to date due to an increasingly hawkish U.S. Fed. This has placed upward pressure on imported inflation and weighed on international reserves—which were drained at the fastest rate in nearly 14 years in September amid Central Bank FX intervention. The BOK’s decision to raise rates in September was aimed at stabilizing the currency and ensuring that inflation returns to target in the medium term.
In its press release, 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. Most panelists expect the BOK to hike rates further at its final meeting of the year on 24 November. Key risks to the monetary policy outlook are the Fed’s stance, the evolution of the won and a sharper-than-expected economic slowdown.
Analysts at Nomura commented on the monetary policy outlook:
“We expect the BOK to return to its baby step of 25bp hikes at the 24 November meeting, in view of the governor’s comments on a terminal rate of 3.5% and two dissenters that hint at a higher bar for another 50bp hike at the November meeting.”