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BOK likely to lift rate to tame rapid inflation: economists

A supermarket in Seoul. (Yonhap)
A supermarket in Seoul. (Yonhap)
The Bank of Korea is likely to raise the benchmark rate by 25 basis points to 1.75 percent this Thursday as Asia’s fourth-largest economy combats persistent inflation and shrinking growth, according to eight out of nine economists polled by The Korea Herald.

But the central bank, which usually changes its rate in 25-basis point increments, is unlikely to back a sudden 50-basis point raise because there’s ample room left for more hikes in the latter half of this year when inflation could ease, according to the eight economists who predict a moderate hike.

Consumer prices rose to a faster-than-expected 4.8 percent year on year in April, standing well above the central bank’s 2 percent target for the 13th month straight. The rising cost of energy and raw materials and a global supply chain crisis have markedly decelerated growth.

“Inflation is rising way too fast and out of the range the bank has its eyes set on. Some of us see the price index hitting even 5 percent soon,” said Kang Sung-jin, an economics professor at Korea University.

Kang said there could be a “big” rate hike, which BOK Governor Rhee Chang-yong himself openly backed, without fixing a date the raise will take place. Kang said runaway inflation was not the only reason the central bank is keen on raising borrowing costs.

“The US backed a big hike and if we don’t fall in line, we risk losing the rate premium over the US. It will be a loss for South Korea,” Kang added. Early in May, the US Federal Reserve lifted rates by half a percentage point to a range between 0.75 percent and 1 percent, in its biggest hike in 22 years.

At its policy board meeting, the BOK is also expected to revise up its inflation forecast for the year from its current estimate of 3.1 percent to a 4 percent range, marking the first time the target reaches 4 percent since July 2011.

“Curbing runaway inflation is the absolute priority for the BOK, and that’s why I think the bank would back a big hike of 50 basis points in July following worsening inflation data in preceding months,” said Joo Won, deputy director at Hyundai Research Institute.

Food price hikes, led by a surge in meat prices, are increasingly weighing on household spending. The surge is testing the central bank’s tolerance for red-hot inflation seeping into the economy, according to the one economist out of nine who predicted a hike of 50 basis points.

“The pork supply is almost the same as last year’s, or maybe a bit in excess, but can no way match the surging demand,” said an official at the Handon Fund Management Committee, a private group of pork producers who run a joint fund to deal with disruptions in the industry. Beef and dairy producers run similar groups.

Meanwhile, eating out has become all the more expensive, with prices of Koreans’ favorite menu items like cold noodles reaching record highs. As prices rattle policymakers, the National Assembly is set to vote on an extra spending plan the new Yoon Suk-yeol government has proposed to help COVID-19-hit businesses.

By Choi Si-young (
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Korea Herald daum