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BOK likely to raise interest rate to 1% amid inflationary pressure

Experts agree on hike of 25 basis points by end of year, but divided over next year’s projections

The Bank of Korea headquarters in central Seoul (Yonhap)
The Bank of Korea headquarters in central Seoul (Yonhap)
South Korea’s central bank is expected to carry out its second rate hike in the pandemic era this week, and is likely to raise it by 25 basis points to 1 percent, experts said Sunday.

The Bank of Korea in August raised its base rate to 0.75 percent from a record-low 0.5 percent, which it had slashed to in May 2020 to cushion the market from COVID-19 woes. It kept the rate anchored at 0.75 percent in the following meeting held in October.

In the last monetary policy meeting of the year scheduled Thursday, the BOK’s monetary policy board is likely to carry out a rate hike due to growing concerns of inflation, putting a solid brake on the snowballing household debt and keeping pace with the nation’s fast-recovering economy, local analysts said. Experts also took the meeting minutes from the latest rate-setting meeting held last month -- in which the monetary policy board decided to keep the rate steady at 0.75 percent -- hinting a future rate hike into account.

“The BOK is likely to carry out a rate hike to further stabilize the financial market,” said Kim Sang-hoon, an analyst at KB Securities.

“While the pace of household debt growth has somewhat slowed down, the growth in mortgage lending is continuing to gain momentum. Overall, the economy is displaying modest recovery and the inflationary pressure is high,” he added.

South Korean banks’ loans to households gained at a slower pace in October, standing at 1,057.9 trillion won ($897.3 billion) as of end-October, up 5.2 trillion won on-month, BOK data released earlier this month showed. The on-month growth slowed from a 6.4 trillion-won rise in September, as the government tightened loan screening and lending regulations.

Of total household loans, mortgage loans gained 4.7 trillion won on-month in October to 774.5 trillion won, slightly slowing from a gain of 5.6 trillion won observed in the previous month.

Asia’s fourth-largest economy’s consumer prices grew 3.2 percent on-year in October, the sharpest gain in almost a decade, due to the base effect and surging oil prices. Inflation rose more than 2 percent -- the central bank’s inflation target -- for the seventh consecutive month.

“Based on the October rate-setting meeting minutes, a rate hike will come, but the decision won’t be unanimous,” said Cho Yong-gu, an analyst at Shinyoung Securities.

Four out of the six monetary policy board members voiced the need to carry out a rate hike, according to the meeting minutes released Nov. 2, with an unnamed member saying the move would contribute to the normalization of financial and asset imbalance. There are currently seven monetary policy board members, including BOK Gov. Lee Ju-yeol, but as Lee chairs the rate-setting meeting, he refrains from overtly expressing his opinion.

Meanwhile, experts were divided on the forecast for next year, with some saying the BOK will carry out only one rate hike of 25 basis points for the entire 2022, and others projecting more to come down the pipeline.

“When the US Federal Reserve wraps up tapering by the planned mid-2022 and talks of a rate hike there starts to buzz, the BOK is projected to raise its rate in July by another 25 basis points to 1.25 percent next year,” said Kang Seung-won, an analyst at NH Investment & Securities.

Those with a more hawkish view believe that the BOK will carry out two rate hikes next year to keep pace with other major economies gearing up for normalization of monetary policies.

“Next year, the BOK is projected to raise its base rate to 1.25 percent and carry out another rate hike in the third quarter when other major economies kick off policy normalization,” Cho at Shinyoung Securities said.

On this year's inflation target, experts expect the BOK to raise it from the current 2.1 percent projection made in August by at least 0.1 percentage point this week. 

“The ongoing global supply chain bottleneck and the surge in raw materials has fueled inflationary pressure,” Ahn Ye-ha, an analyst at Kiwoom Securities said

(mkjung@heraldcorp.com)
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