The Bank of Korea raised its key policy rate by a quarter percentage point Thursday and revised down the country’s growth outlook, amid runaway inflation accelerated by soaring energy prices.
The rate hike itself was widely expected in the market. More significant is the revised outlook the central bank projected for the country going forward, and the figures are far from rosy.
The central bank’s latest move put the benchmark seven-day repo rate to 1.75 percent, up from 1.5 percent. Given that the BOK raised the rate in January and April by a quarter percentage point each time, the third increase -- the first back-to-back hikes in 15 years -- illustrates the depth of the deepening inflation.
Some market observers earlier speculated about a “big step,” or a 0.5 percentage-point increase, following in the footsteps of the US Federal Reserve, which is expected to continue to raise rates this year.
Such speculation was not groundless, as BOK Gov. Rhee Chang-yong recently said a big-step rate hike could not be ruled out should the country’s inflation deteriorate further.
But a significant increase is hard to pull off, even if it is needed to battle the current inflation. After all, a drastic hike could send too big a shock through the country’s economy as it is overburdened by heavy household debt -- 1,860 trillion won ($1.47 trillion) as of the first quarter of this year.
In other words, the back-to-back rate hikes are possibly the best option the central bank could use in its playbook. The latest rate increase would put greater burden on those who have taken out loans from banks to buy houses or shore up their pandemic-hit businesses. But the rate-setting board of the BOK seems to think that a consistent monetary stance is more important at this critical juncture.
The central bank’s consistent signal to tame inflation is indeed necessary. The country’s consumer prices, a key gauge of inflation, soared 4.8 percent on-year in April, the biggest increase since October 2008. Some observers talk about a near or over 5 percent level in May, as inflation expectations hit a 10-year high for the month. The BOK also revised upward its inflation outlook for this year to 4.5 percent, up from 3.1 percent projected three months earlier.
As in other embattled countries, high inflation is starting to look entrenched in South Korea, as the protracted Russia-Ukraine war and lockdowns of major cities in China clog the already worsening global supply chain and send energy and commodity prices soaring higher. Fighting inflation is now the top priority for many central bankers and policymakers around the world.
High oil and commodity prices are already hurting the country’s trade figures. In the first 20 days of May, South Korea suffered a trade deficit of $4.83 billion, as a sharp rise in import costs outpaced a solid growth in exports. The trade deficit has ballooned to $10.9 billion so far this year.
The possibility of a trade deficit this year is a serious warning sign for the country, which has maintained a surplus since 1998, except for 2008, and has depended heavily on exports for its growth momentum.
The growth outlook has dimmed, as well. The BOK on Thursday cut the 2022 economic growth prediction to 2.7 percent, compared with 3 percent three months earlier. The figure for 2023 is now forecast to stand at 2.4 percent.
A combination of high inflation and tepid growth is throwing cold water on the prospect of the country’s economic recovery out of the pandemic-induced slump. While the BOK tries to rein in inflation, government agencies in charge of economic policies are urged to come up with extra measures to help the country avoid falling into a stagnation or recession trap.
By Korea Herald (firstname.lastname@example.org