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The Bank of Korea added to a wave of global action against inflation this week by raising its key interest rate on Thursday, brushing aside concerns about a leadership vacuum at the bank and global risks to the export-dependent economy.
The central bank raised its seven-day repurchase rate by a quarter percentage point to 1.5% in the board’s first-ever decision without a governor in place. Some 11 economists surveyed by Bloomberg had expected the hike, while 10 forecast policy would remain unchanged.
While the BOK warned that the economy would grow less than previously forecast this year, the decision highlights the more pressing sense of urgency among policy makers to tackle inflation fueled by the war in Ukraine. The bank last week warned it’s likely to remain in a 4% range for the foreseeable future.
“Big changes have happened since the February meeting,” Joo Sang-yong, acting chairman of the policy committee, said at a press briefing after the decision. “We concluded the existing inflationary pressures could go on for longer than expected due to the Ukraine situation. So despite the vacancy of the governor position, we had no choice but to respond.”
South Korean bonds rallied, with the yield on the nation’s three-year bond falling as much as 10 basis points to 2.9%, as uncertainties over the central bank’s policy path eased. The South Korean won was little changed, up 0.2% to 1,224.65 per dollar.
Central banks worldwide are struggling to cool consumer prices fueled by pandemic-era stimulus and exacerbated by Russia’s invasion of Ukraine.
Singapore also took action Thursday, using an aggressive dual move to tighten its currency-focused policy for the first time since 2010. The Bank of Canada and the Reserve Bank of New Zealand weighed in with jumbo half-percentage point hikes on Wednesday.
Meantime, Federal Reserve policy makers have signaled they could move in half-point steps if needed, starting when they next meet in early May.
The BOK’s decision should be seen as a pre-emptive step in light of higher-than-expected inflation, consumer-price concerns among the presidential transition committee, the large hikes in New Zealand and Canada and the strong possibility of the Fed following them, said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities.
“Realistically speaking, this paves the way for a maximum of two more hikes by the end of the third quarter,” Cho said, raising the chance of the rate reaching 2.25% by year-end.
The BOK already raised rates three times between August and January to tackle soaring asset prices and inflation, before standing pat in former Governor Lee Ju-yeol’s final meeting in February.
The nominated new Governor Rhee Chang-yong has made clear he sees inflation as a pressing concern ahead of a parliamentary hearing on April 19. Assuming Rhee is confirmed in the role, as is widely expected, he may continue with the push toward normalization, starting as early as the next policy meeting on May 26.
The unanimous decision to raise rates even in the absence of a governor, suggests Rhee doesn’t face any immediate opposition to continuing along a tightening path.
“I think Rhee may not differ too much from Lee in the monetary policy handling at this point though he may be perceived to be less hawkish,” said Ho Woei Chen, an economist at United Overseas Bank Ltd. in Singapore, before the decision.
Choo Kyung-ho, tapped by President-elect Yoon Suk Yeol to lead the finance ministry, also views inflation as an urgent problem, as well as an overheating housing market. He told reporters Sunday that he would frequently meet with thae BOK to coordinate policy once confirmed in office.
The BOK has been in the vanguard of central bank tightening since the global economy began to emerge from the grip of the pandemic last year. The bank was initially concerned about inflated asset prices from ultra-low rates, before switching to focus more on intensifying inflationary pressure.
That change reflects the big changes since February that Joo flagged. The invasion of Ukraine drove up energy and other commodity prices, increasing headwinds to Korea’s economy. China’s lockdowns of major cities to contain the spread of the omicron variant are also weighing on the world economy as they renew disruptions to global supply chains.
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