South Korea steps up inflation fight with back-to-back rate hikes
SEOUL (Reuters) – South Korea’s central bank on Thursday delivered back-to-back interest rate hikes and forecast further aggressive increases to wrestle consumer inflation down from 13-year highs. The Bank of Korea raised its benchmark policy rate by a quarter of a percentage point to 1. On Wednesday, New Zealand’s central bank hiked by an aggressive 50 basis points. “Our policy focus will be on price stability for some time, and it would be appropriate to say that (time frame) would be for a few months, for now,” Governor Rhee Chang-yong said at a news conference after the six-member board’s unanimous rate decision. All but one of the 28 analysts polled by Reuters expected a hike.
Back-to-back interest rate rises by the BOK follow more than 100 cumulative basis points of hikes since August 2021 in one of the most forceful tightening campaigns ever by the bank. A major concern is consumer inflation running at a 13-year high, which threatens to become entrenched, as a key measure of price expectations among South Koreans rose in May to its highest in nearly a decade. “The Board sees it as warranted to conduct monetary policy with more emphasis on inflation for sometime,” the BOK’s policy statement said, which analyst Cho Yong-gu from Shinyoung Securities considers the strongest signal yet for additional rate hikes. “I see that the bank will raise rates again both in July and August and am even considering changing the year-end forecast to 2. June futures on three-year treasury bonds dropped as much as 29 points to 105.
Commenting on stagflation risks, Governor Rhee said growth is weaker but may not be near recessionary levels even as slower global demand is expected to hurt South Korea exports in the second half. “The upshot is that while the Bank should remain hawkish in the near term, it is likely to turn decidedly less so further ahead as the economy slows,” said Alex Holmes, Asia economist at Capital Economics. (Additional reporting by Choonsik Yoo, Jihoon Lee; Editing by Sam Holmes & Shri Navaratnam)
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