Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Bank of Korea Hikes Again as Inflation Fears Mount, Fed Gears Up

Forex Jan 13, 2022 10:27PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. Bank of Korea Hikes Again as Inflation Fears Mount, Fed Gears Up

(Bloomberg) -- The Bank of Korea raised interest rates on Friday for the third time since the summer, underscoring the board’s determination to swiftly curb inflation and financial risks, and its belief that the economy can weather virus outbreaks with less central bank support.  

The quarter-percentage-point increase to 1.25% brings the rate back to where it was before the pandemic struck. The decision was expected by 14 of 19 economists surveyed by Bloomberg. The rest forecast a hold. 

Bond futures fell as the monetary policy statement suggested rate hikes will continue. The BOK said in a statement that it expected inflation to stay in the 3% range “for a considerable time.” That view is in stark contrast to its stance in November and an indication of how price concerns have ballooned since then.  

The rare back-to-back rate hike likely indicates that Governor Lee Ju-yeol had become increasingly uncomfortable about waiting to move again, following recent signs that the Federal Reserve will probably raise borrowing costs earlier and more aggressively. 

An easing of daily Covid infections from a recent peak in December also helped create a window of opportunity that Lee was apparently keen to take before the end of his term in March and a presidential election the same month. Government plans for an extra budget indicate there will be continued fiscal support for the economy, adding to the case for a hike.

The rate decision shows that the BOK saw omicron’s economic impact as limited and was concerned the variant will likely add upward pressure on inflation, said Cho Yong-gu, a fixed income strategist at Shinyoung Securities. 

“Financial imbalances are yet to be fully resolved, and the Fed bringing forward its tightening timing was also likely a factor,” Cho said.

Moving Ahead 

Korea’s 10-year government yields rose three basis points to 2.43% on Friday, following the BOK’s inflation forecast and as Finance Minister Hong Nam-Ki said the extra budget will be funded by bond issuance. The won was little changed at 1,188.40 as of 10:37 a.m. in Seoul. 

The latest rate move puts the BOK further ahead of global peers in pulling back from pandemic stimulus settings as an increasing number of central bankers consider the timing of their own actions.  

Lee has said that the BOK doesn’t need to match the Fed on rate hikes, but no action taken this quarter despite the hawkish signals from the Fed could have unsettled financial markets expecting rate increases.

Maintaining a premium over U.S. interest rates can help maintain stability in local markets and prevent a further weakening of the won. Finance Minister Hong ordered officials to closely monitor foreign exchange movements on Monday after the currency reached its weakest level since July 2020 last week. 

While the Korean central bank largely justified its initial rate hike in August as a move to avoid financial imbalances building up from prolonged stimulus, it has since added its concern over rapid price growth into the mix. At 3.7%, inflation is hovering near a decade-high, providing a key motive for early action. 

Faster Inflation 

In Friday’s statement, the BOK said inflation will average above the mid-2% level this year, higher than the 2% it forecast in November. The bank still expected economic growth of around 3%. It added the board will judge when to further adjust policy accommodation, indicating more tightening ahead. 

The economic backdrop has been supportive of a hike. Despite strict virus curbs in place, the broader economy appears to be holding up better than in previous waves, with export strength continuing and consumption taking less of a hit. 

Attention now will turn to whether the BOK can continue to raise rates at such a pace -- three times in five months -- or whether there will be a lengthy hiatus before the next move. 

Lee has repeatedly characterized the rate hikes since August as a backing away from extraordinary stimulus rather than a tightening of policy. With rates back at pre-pandemic levels, the BOK may now move at a slower pace over the coming months, a view shared by economists.  

(Updates with BOK’s policy statement.)

©2022 Bloomberg L.P.

Bank of Korea Hikes Again as Inflation Fears Mount, Fed Gears Up
 

Related Articles

China growth woes boost dollar, weigh down Aussie
China growth woes boost dollar, weigh down Aussie By Reuters - Aug 16, 2022 3

By Alun John HONG KONG (Reuters) - The safe-haven U.S. dollar hit a three-week high on Tuesday after weak global economic data revived concerns of a global recession. The dollar...

Dollar Edges Higher; Recession Fears Boost Safe Haven
Dollar Edges Higher; Recession Fears Boost Safe Haven By Investing.com - Aug 16, 2022 3

By Peter Nurse Investing.com - The U.S. dollar edged higher in early European trade Tuesday, remaining near a one-week high as global recession fears prompted demand for the safe...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email