Korea: BOK makes historic 50 basis points hike in July
At its meeting on 13 July, the Bank of Korea (BOK) raised the base rate by 50 basis points to 2.25%, marking the steepest rate hike since the BOK adopted its current monetary framework in 1999. The decision matched market expectations. The BOK said that the hike was necessary to avoid “the entrenchment of high inflation”: price pressures are becoming broader based as the economy reopens from Covid-19, with core inflation increasing to 3.9% in June (May: 3.4%). The BOK said that headline inflation would remain above 6% “for some time”, remaining “substantially above” its May forecast of 4.5% for this year as a whole. As a result of these developments, short-run inflation expectations are “rising sharply”, according to the BOK. Thus, the BOK felt it necessary to raise rates in order to keep medium-run inflation expectations anchored to its 2.0% target.
In its press release, the BOK adopted a more hawkish stance in its forward guidance. It stated that further rate hikes were “warranted”, given that inflation is expected to run above target for “some time”. As a result, the majority of our panelists expect further rate hikes this year.
Analysts at Goldman Sachs commented on the monetary policy outlook:
“In terms of where BoK is on the degree of accommodation, Governor Rhee also commented he personally thinks the current policy rate of 2.25% is near the low end of the neutral rate range, though another one or two 25bp hikes would still not be considered as tight territory. Governor Rhee thinks market expectation of BoK policy rate at 2.75%-3.0% by year-end is rational.”
The next monetary policy meeting will be held on 25 August.