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Korea Monetary Policy April 2022

Korea: BOK raises rates in April with governor’s seat empty

At its meeting on 14 April, the Bank of Korea (BOK) raised the base rate by 25 basis points to 1.50%. The decision surprised the market, as it was taken without a governor. The governor’s post is temporarily empty due to the end of prior Chief Lee Ju-yeol’s term last month.

Acting Chairman Joo Sang-yong stated at a press briefing after the decision that “we had no choice but to respond” to the upward pressure on inflation caused by the war in Ukraine. Rising commodity prices have driven inflation in recent months further above the BOK’s 2.0% target, which has since contributed to higher core inflation and inflation expectations which could cause second-round effects and a wage-price spiral. The Bank has substantially raised its inflation forecasts from its December meeting—in fact, it said headline inflation this year is expected to be “substantially above” its February forecast of 3.1%, while core inflation will remain above 3.0% “for some time”. As a result, the Bank felt compelled to raise rates in order to bring inflation to target in the medium term.

In its press release, the BOK kept its hawkish tone, stating that it would adjust the degree of accommodation after taking into account inflation, financial imbalances, the impacts of the current policy rate and possible future hikes, and monetary policies in other major economies. The large majority of our panelists see at least one additional hike of 25 basis points by the end of this year.

ING’s Min Joo Kang sees the hike as part of an ongoing gradual hiking cycle:

“As inflation is expected to climb further, the Central Bank will continue to stay on the hike cycle till the end of this year. […] We do not expect an immediate rate increase in May—[the] Bank of Korea (BOK) will take a breather, monitor the impact of rate hikes, and carefully study the future paths of growth and inflation. The MPC statement clearly expressed that today’s decision was made based on heavier concerns about the inflation outlook, thus further policy adjustments are needed, while the downside risk to growth is somewhat limited.”

Analysts at Nomura, meanwhile, expect less hawkish moves:

“The BOK hiked, and we believe it’s the final hike. […] Despite the BOK’s heightened concerns over persistently high inflation, we believe inflation concerns will give way to worries about a growth slowdown in the BOK’s reaction function in the coming months, as the chip cycle is fast approaching its cyclical peak, according to Nomura’s tech team. We also expect the consumption recovery to remain weak amid rising interest rates and high oil prices.”

The next monetary policy meeting will be held on 26 May.

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