South Korea’s central bank joins peers in historic half-point rate hike

South Korea's central bank joins peers in historic half-point rate hike
FILE PHOTO: The logo of the Bank of Korea is seen in Seoul, South Korea, November 30, 2017. REUTERS/Kim Hong-Ji

SEOUL: South Korea’s central bank on Wednesday (Jul 13) delivered a historic half-point interest rate hike to wrest control of inflation running at the fastest pace in 24 years.

The Bank of Korea (BOK) raised its benchmark policy rate by 50 basis points to 2.25 per cent, the biggest increase since the bank adopted the current policy system in 1999, as pressure mounts for policymakers to act faster.

Twenty-seven of 32 analysts expected the bank to go for an unprecedented half-point hike in a Reuters poll, while the remaining five expected a quarter-point hike.

The decision could help curb further weakening of the won after the currency tumbled 9.4 per cent against the U.S. dollar this year, making it one of the worst performers among emerging markets.

Wednesday’s move keeps the BOK at the forefront of global monetary tightening as inflation threatens to become entrenched for a resource-poor nation grappling with surging energy prices, compounded by the war in Ukraine.

The bigger-than-usual hike comes as other major central banks including the Bank of Canada and the Reserve Bank of New Zealand delivered outsized rate hikes in recent weeks. The US Federal Reserve last month raised its key rate by 75 basis points and is expected to carry out similar-sized moves.

“We view back-to-back 50 basis points hikes by BOK in July and August to be less likely although Governor Rhee could keep the option of an extra +50 bps rate hike on the table,” said Citigroup analyst Kim Jin-woo.

“The press conference and the bank’s monetary policy statement could highlight a preemptive monetary policy ‘tightening’ stance to manage inflation expectations.”

Governor Rhee Chang-yong will hold a news conference at 0210 GMT.

Most analysts see South Korea’s policy rate reaching 2.75 per cent by the end of this year, up from 2.25 per cent in the May poll.

The BOK expects the economy to expand 2.7 per cent this year.

Source: Reuters/gs