Money in Korea

Korea - Money

BoK hikes rate again in January

At its meeting on 14 January, the Bank of Korea (BoK) raised the base rate by 25 basis points to 1.25%. The decision was broadly expected by market analysts. The move followed a similar hike in November, and marked further progress towards the normalization of policy.

The Bank’s decision came amid a continued economic recovery and still-elevated price pressures, with inflation having reached 3.7% in December—well above the Bank’s 2.0% target. Meanwhile, the global economy has shown resilience in light of the recent spread of the Omicron variant. Moreover, movements from major central banks—including a hike by the Bank of England and an increasingly hawkish tone from the Federal Reserve in December, further supported the Bank’s decision to hike.

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

Looking at the possible impact of a change in leadership at the Bank, Robert Carnell, regional head of research for Asia-Pacific at ING, noted:

“There was one opponent to today's decision, which may indicate that the coming months may see a little more caution in the pace of rate increase. And remember, March will be Lee's last meeting as BoK Governor, as he is stepping down. But there may be no replacement immediately, as there is a presidential election in March, and it may be some months before the incoming president appoints a new governor. It is possible that this is one factor why rates were indeed raised today, and one argument why we may see a further hike before Governor Lee steps down in case the leadership vacuum leads to policy inactivity until the new appointment.”

Meanwhile, Krystal Tan, economist at ANZ, commented:

“Putting all of this together, the BoK’s policy messaging today, coupled with a supplementary budget in the pipeline, signals that the Central Bank’s rate-hiking cycle has more room to run. We are now pencilling in a 25bp rate hike in Q2. […] Further out, we see the possibility of another 25bp hike in H2, but we will await more clarity on factors, including the inflation path, labour market recovery, the global trade environment and financial imbalances. As things stand, we are of the view that some supply-side pressures will ease in H2 this year and that there are no clear signs that wage growth is spilling over in South Korea and threatening structurally higher inflation as yet.”

The next monetary policy meeting will be held on 24 February.

FocusEconomics Consensus Forecast panelists see the base rate ending 2022 at 1.46% and 2023 at 1.50%.