Bank of Korea may hike rates this week to curb inflation, household debt

South Korea’s central bank is almost certain to raise interest rates on Friday to curb inflation and household debt as the US Federal Reserve is expected to increase borrowing costs in March, a survey by The Korea Economic Daily showed.

The Bank of Korea is predicted to hike the base interest rate by 25 basis points (bps) to 1.25%, according to the poll of 10 economists and financial market experts on Thursday.

BOK Governor Lee Ju-yeol has repeatedly signaled a further rate hike.

“We will continue to appropriately adjust the degree of monetary policy accommodation in line with improving economic conditions,” Lee said in his new year speech released on Dec. 31, 2021.

Lee said the central bank needs to normalize interest rates that had been excessively lowered in November last year after it raised borrowing costs.

Such remarks indicate the BOK is highly likely to raise interest rates this week, said Chang Min, a Senior Research Fellow at the Korea Institute of Finance. Chang was the director-general of the BOK’s research department from 2015 to 2018.

INFLATION, HOUSEHOLD DEBT, FED

The central bank last year jacked up the rate twice. In August, the monetary authority became the first central bank in Asia with a 25-bp hike to end its ultra-easy policy that supported the region’s fourth-largest economy during the COVID-19 pandemic era. The BOK made the other hike in November.

Despite the tightening moves, South Korea’s consumer inflation remained at a stubbornly high 3.7% in December, just shy of a 3.8% decade peak in November, according to government data.

“Korea’s economic data such as export growth held firm and consumer inflation stayed high,” said KB Securities Co.’s analyst Kim Sang-hoon, expecting a hike this week.

The BOK is likely to further slow growth in household debt, survey participants said.

“The BOK has provided enough warning that it will curb accumulation of financial imbalances such as rising household debt,” said Shinyoung Securities analyst Cho Young-koo, agreeing with Kim’s forecast.

The central bank may not have a choice but to raise borrowing costs sooner, given the Fed’s hawkish stance, in order to keep interest rate differentials and prevent capital outflows, according to the survey.

“The Fed is speeding up its tightening monetary policy. The BOK will raise rates this week without delaying the timing,” said Ha Joonkyung, an economics professor at Hanyang University.

South Korea’s monetary authority may increase rates by up to four times to 2.00% this year, some predicted.

“The BOK is likely to make four hikes once the Fed accelerates the tightening and the country’s inflation holds around 3-4%,” said Kim So-young, a Seoul National University economics professor.

The upcoming presidential election on March 9 was cited as a reason for a potential BOK rate hike this week.

“The next monetary policy meeting is to be held on Feb. 24, just before the presidential election,” said Hana Financial Investment analyst Lee Mi-seon. “A delay in a rate hike is likely to put more burden than benefit on the policy.”

Write to Ik-Hwan Kim at lovepen@hankyung.com
Jongwoo Cheon edited this article.