BOK underlines need to maintain monetary tightening as inflation could stay high

SEOUL– The Bank of Korea (BOK) on Thursday underlined the need to maintain its monetary tightening “for the time being” to bring down inflation that is expected to stay much higher than its target level.

“Since it is expected that inflation will stay much higher than the target level even if the economy growth slows, it is necessary to continue the upward trend of interest rates for the time being,” the BOK said in a report submitted to lawmakers briefing on latest economic and financial market conditions.

The BOK forecast that consumer prices, a key gauge of inflation, will grow at a moderated pace “steadily” due to downward pressure on the economy but they will stay in the 5 percent range for some time.

The central bank has hiked its key policy rate nine times and by a combined 2.75 percentage points since August last year to combat inflation that has been driven up by soaring energy bills, supply disruptions and growing demand bolstered by the global economy reopening from the pandemic.

The rate stays at 3.25 percent, and market watchers predict that the terminal rate of the current rate hike cycle could rise to as high as 3.5 percent.

The country’s consumer prices rose 5 percent in November from a year earlier, slowing from a 5.7 percent rise tallied in October. Price growth has been moderating after rising as high as 6.3 percent in July, the highest in about 24 years.

The BOK said that supply-side upward inflation pressure from oil prices and supply disruptions has been eased in the second half but worried that the pent-up demand in the service sector could limit the impact of an economic slowdown lowering price growth.

Touching on latest economic situations, the central bank said that fast-dwindling exports of late appear to be undercutting growth momentum.

Exports, a major growth engine for South Korea, shrank 14 percent on-year in November, which marked the second straight month of a contraction, according to earlier government data.

The central bank cited monetary tightening in the United States and other major countries and the global economic downturn as factors that weigh on the local economy.

In particular, exports, corporate investment and production will be affected in part by the cyclical downturn of the global semiconductor sector, the BOK said.

The global chip sector has been going through a downturn since reaching a peak in the third quarter of last year. The downdraft has been accelerating further since the third quarter of this year, the central bank said.

“Demand for chips is expected to remain sluggish for the time being due to major countries’ monetary tightening and the prolonged war in Ukraine,” it said.

South Korea is home to such global chipmaking leaders as Samsung Electronics Co. and SK hynix Inc.

On the local front, the BOK also voiced worries about high interest rates, increasing debt burden on households and businesses, a slump in the property market and volatility in the bond market that could hurt corporate investment.

Source: Yonhap News Agency

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