South Korea Hikes Key Rate By 25 Bps

South Korea Hikes Key Rate By 25 Bps

January 13, 2023

Despite slowing growth, South Korea’s central bank raised its benchmark rate by a quarter-point as inflation is expected to remain above target for a considerable time.

The Monetary Policy Board of the Bank of Korea decided to raise the Base Rate by 25 basis points to 3.50 percent from 3.25 percent.

The central bank has hiked its policy rate by altogether 300 basis points in the current tightening cycle that began in August 2021, taking the rate to the highest since 2008.

The bank expects economic growth to weaken, affected by the global economic slowdown and the increase in interest rates. GDP growth for this year will be below the 1.7 percent projected in November, the board said.

Consumer price inflation is seen around 5 percent in January and February but to fall gradually on the base effect and weakening pressure from the demand side. Inflation is expected to be consistent with the November forecast of 3.6 percent.

“The Board will judge whether the Base Rate needs to rise further while thoroughly assessing the economic downside risks and financial stability risks, the effects of the Base Rate raises, the pace of inflation slowdown, and monetary policy changes in major countries,” the bank said in the statement.

Policymakers observed that rising borrowing rates have weighed on household loans. House prices have declined significantly.

With higher interest rates weighing on domestic demand and weaker global growth set to drag on exports, growth looks set to slow further, Capital Economics’ economist Gareth Leather said.

Given the worsening economic growth outlook and slowing inflation, today’s hike will mark the end of the tightening cycle, the economist noted. An early end to the tightening cycle would also help the central bank achieve a soft landing for the property sector.

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