 |
| Bank of Korea / Yonhap |
The Bank of Korea (BOK) raised its key policy rate by a quarter percentage point to a pre-pandemic level Friday in a move to tackle persistent inflation concerns and normalize its protracted loose monetary measures amid an economic recovery.
The central bank’s monetary policy board convened its first rate-setting meeting of the year and voted to raise its seven-day repo rate to 1.25 percent.
The decision came after the bank raised the rate by 0.25 percentage points in the previous board meeting in November. This also marked the third rate increase since the BOK delivered its first rise during the pandemic in August.
Friday’s hike brought the rate back to the pre-pandemic level maintained before March 2020 when the BOK held an emergency meeting and slashed it by a half percentage point to 0.75 percent to cushion the fallout from the pandemic. Two months later, it trimmed the rate further to an all-time low of 0.5 percent.
The zero range interest rate had been in place for about two years to shore up the economy buffeted by less spending and sluggish business activity amid uncertainty due to the pandemic.
The central bank, however, has recently ramped up efforts to bring the loose monetary policy back to normal as the economy is revving up amid strong exports, and concerns are growing over inflation driven by global supply disruptions and a rebound in consumption.
South Korea’s consumer inflation jumped 3.7 percent in December from a year earlier, marking three straight months of a more than 3 percent rise.
For 2021, consumer inflation rose 2.5 percent from a year earlier, the fastest growth in 10 years and higher than the BOK’s medium range target of keeping price increases at 2 percent.
Inflation has emerged as a global issue, prompting central bankers in the U.S. and other major economies to tighten monetary measures.
Recently unveiled minutes of the U.S. Federal Reserve’s December meeting indicated the Fed will likely speed up the tightening of its loose monetary policy “sooner or at a faster pace.”
The Fed had been widely expected to wind down its pandemic-era asset buying stimulus in March and start to raise its near-zero interest rates in June, but the latest minutes raised the possibility that rate increases could come as early as March.
Following a rate hike decision in November, BOK Gov. Lee Ju-yeol told reporters that the country’s monetary policy remained still “accommodative,” leaving the possibility for further rate hikes this year.
Friday’s increase came despite lingering worries over an upsurge of COVID-19 infections and the spread of the potentially more transmissible Omicron variant of the coronavirus.
Asia’s fourth-largest economy is on a recovery track on the back of robust exports but a resurgence of virus cases and the fast spread of the Omicron variant could put a damper on the recovery of private spending.
The government has re-imposed toughened antivirus restrictions since mid-December after daily infections soared to nearly 8,000 under its eased “Living with COVID-19” strategy.
The current antivirus curbs, set to be in effect until Sunday, include a four-person cap on private gatherings nationwide and a 9 p.m. business hour curfew on cafes and restaurants. The government plans to increase the private gathering ceiling to six people but keep in place the business hour curfew for three more weeks.
The BOK currently expects the South Korean economy to expand 3 percent this year after an estimated 4 percent growth last year. The government predicts the economy will grow 3.1 percent in 2022.