SEOUL– South Korea’s central bank hiked its key policy rate by a quarter percentage point Thursday, as it predicted 2022 inflation could hit the highest level in 14 years amid soaring oil and commodity prices.
As widely expected, the monetary policy board of the Bank of Korea (BOK) voted to increase the benchmark seven-day repo rate to 1.75 percent at a rate-setting meeting held early in the day, according to the central bank.
This marked the third rate hike this year after 0.25 percentage-point increases in both January and April.
It also represented the fifth rise since August last year when the central bank began rolling back its easy monetary policy put in place for about two years to bolster the pandemic-affected economy.
In a separate decision, the BOK revised upward its inflation outlook for this year to 4.5 percent from 3.1 percent projected three months earlier. The forecast, if proved, could be the fastest price growth since 2008, when prices grew 4.7 percent.
The central bank’s economic growth prediction was also lowered from 3 percent to 2.7 percent projected three months earlier.
Thursday’s rate hike came as the country is grappling with high-rise inflation pushed up by soaring oil, energy and other major commodity prices amid the protracted Russia-Ukraine war that has exacerbated the global supply chain disruptions.
South Korea’s consumer prices, a major gauge of inflation, jumped 4.8 percent on-year in April, the fastest rise since October 2008.
Inflation expectations also rose to 3.3 percent in May, the highest level since October 2012. A rise in expected inflation could drive up demand for wages and add to upward pressure on inflation.
First Vice Finance Minister Bang Ki-sun earlier raised the possibility that consumer prices could jump more than 5 percent this month.
The BOK has emphasized that its top priority is to keep inflation in check before it gets out of control, though it remains cautious that rising borrowing costs could put a damper on the economy.
South Korea’s economy has been on a recovery track thanks to robust exports, and expectations are growing for a rise in consumption thanks to recently eased social distancing rules amid a letup in coronavirus infections.
But as the economy is facing growing uncertainty at home and abroad, a rise in borrowing costs is feared to undercut economic growth and possibly tip the economy into a recession.
“The board sees it as warranted to conduct monetary policy with more emphasis on inflation for some time, as the Korean economy is expected to continue its recovery and inflation to run above the target level for a considerable time, despite underlying uncertainties in domestic and external conditions,” the BOK said in a statement.
“In this process the board will judge when to further adjust the degree of accommodation while thoroughly assessing the trends of growth and inflation, the risk of a buildup of financial imbalances, monetary policy changes in major countries, and external economic conditions including geopolitical risks,” it added.
The BOK has also been under pressure to raise its rate as the U.S. Federal Reserve hiked its interest rate by a “big-step” 0.5 percentage point early this month to the 0.75-1 percent range and hinted at further increases down the road as part of monetary policy tightening to tame runaway inflation.
The Fed’s hawkish monetary policy stance has spawned worries here that the spread in borrowing costs between the two countries could reverse in the months to come and spark a massive capital outflow from South Korea and further weaken the local currency against the dollar.
A weak currency could increase upward inflation pressure by making imports more expensive.
BOK Gov. Rhee Chang-yong recently said the possibility of a big-step rate hike cannot be ruled out for South Korea should inflation woes persist.
Source: Yonhap News Agency