BOK unexpectedly hikes interest rate as inflation accelerates

South Korea’s central bank on Thursday raised its policy interest rate in a surprise move as accelerating inflation is feared to bite into growth in Asia’s fourth-largest economy.

The Bank of Korea increased the base interest rate by 25 basis points (bps) to 1.5% in its first-ever monetary policy review held without a governor. Views were almost evenly split among local bond market participants, according to a survey by Korea Financial Investment Association conducted earlier this month.

“It is forecast that consumer price inflation will remain high in the 4% range for some time, and run substantially above the February forecast of 3.1% for the year overall,” the central bank said in a statement released after the rate hike. “Core inflation is forecast to remain around 3% for a considerable time.”

The BOK is expected to raise interest rates two more times this year to reach 2% by end-2022, analysts said.

Central banks around the world are fighting inflation. The US Federal Reserve is expected to raise interest rates by 50 bps next month and soon start cutting its asset portfolio.

INFLATION TO BE HIGHER THAN BOK FORECAST

South Korea’s import prices surged 35.5% in March from a year earlier, the fastest growth since a 13-year-high of 36.3% reported in October last year, according to BOK data earlier in the day. Import costs for coal and petroleum products soared 74.5%, while prices of imported primary metal products rose 37.3%.

Consumer inflation last month jumped 4.1% on-year, the largest growth since December 2011 given skyrocketing energy and commodity prices, government data showed earlier this month, as Russia’s invasion of Ukraine disrupted global supply.

The central bank, however, also saw downside risks to the economy due to the war in Ukraine with growth in 2022 predicted to come in below its February forecast of 3%, said Joo Sang-yong, acting chairman of the six-member policy board.

The monetary authority plans to consider the impact of the crisis in Ukraine both on inflation and growth, Joo said.

INFLATION FIGHTING

The BOK’s latest rate hike came even as Rhee Chang-yong, its governor nominee, has yet to take office after the former chief Lee Ju-yeol retired last month. Rhee is expected to start his four-year term after the mandatory parliamentary hearing on April 19.

The incoming administration set price stabilization as its top priority. President-elect Yoon Suk-yeol last week stressed that special measures were needed to curb inflation.

Choo Kyung-ho, the nominee as deputy prime minister and finance minister, also pledged to fight inflation.

Choo said on April 10 that he would consider the impact of a planned supplementary budget on inflation, indicating the new government may mull cutting its size. Yoon is seeking extra spending of up to 50 trillion won ($40.9 billion) to support small companies and the self-employed hit by COVID-19.

“I will deliberate on how we can achieve the objective of and draw an outcome from the extra budget while easing concerns (about the inflation),” Choo said after Yoon announced his nomination.

Calls for reducing the extra budget mounted, given rampant inflation and the country’s record sovereign debt.

Write to Mi-Hyun Jo at mwise@hankyung.com
Jongwoo Cheon edited this article.