The BOK is expected to raise interest rates to 1% amid inflationary pressure


Experts agree 25 basis points hike by year-end, but split on next year’s projections

The headquarters of the Bank of Korea in central Seoul (Yonhap)

South Korea’s central bank is expected to make its second pandemic-era rate hike this week, and is expected to increase it by 25 basis points to 1%, experts said on Sunday.

In August, the Bank of Korea raised its key rate to 0.75%, from a record high of 0.5%, which it cut in May 2020 to shield the market from COVID-19 problems. He kept the rate pegged at 0.75% at the next meeting in October.

At the last monetary policy meeting of the year scheduled for Thursday, the BOK’s monetary policy board is likely to hike rates amid rising inflation fears, putting a solid drag on household debt and keeping pace with the country’s rapid recovery. economic, according to local analysts. Experts also took minutes from the latest rate-setting meeting held last month – in which the monetary policy council decided to keep the rate at 0.75% – hinting at a future hike in rates. rate.

“The BOK is likely to proceed with a rate hike to further stabilize the financial market,” said Kim Sang-hoon, analyst at KB Securities.

“While the pace of household debt growth has slowed somewhat, mortgage lending growth continues to accelerate. Overall, the economy is showing a modest recovery and inflationary pressure is high, ”he added.

South Korean bank loans to households grew at a slower pace in October, reaching 1,057.9 trillion won ($ 897.3 billion) at the end of October, up 5.2 trillion won in a month, according to BOK data released earlier this month. Growth for the month slowed from an increase of 6.4 trillion won in September, as the government tightened regulations on screening and lending of loans.

Of total loans to households, mortgage loans increased by 4.7 trillion won in October to 774.5 trillion won, a slight slowdown from the 5.6 trillion won gain in the previous month.

Consumer prices in Asia’s fourth-largest economy rose 3.2% year-on-year in October, the largest increase in nearly a decade, driven by base effect and surging prices petrol. Inflation rose by more than 2% – the central bank’s inflation target – for the seventh month in a row.

“Based on the minutes from the October rate-setting meeting, a rate hike will come, but the decision will not be unanimous,” said Cho Yong-gu, analyst at Shinyoung Securities.

Four of the six members of the monetary policy board expressed the need for a rate hike, according to meeting minutes released on November 2, with an anonymous member saying the move would help normalize the financial imbalance and active. There are currently seven members of the monetary policy board, including BOK Governor Lee Ju-yeol, but as Lee chairs the rate-setting meeting, he refrains from expressing his opinion openly.

Meanwhile, experts were divided over forecasts for next year, with some saying the BOK will only make a single 25 basis point rate hike for the whole of 2022, and others projecting any further.

“When the US Federal Reserve completes its cut by the expected mid-2022 and discussions of a rate hike begin to buzz, the BOK is expected to raise its rate in July by an additional 25 basis points to 1.25% next year, ”Kang said. Seung-won, analyst at NH Investment & Securities.

Those with a more hawkish view believe the BOK will make two rate hikes next year to keep pace with other major economies preparing for monetary policy normalization.

“Next year, the BOK is expected to raise its base rate to 1.25% and make another rate hike in the third quarter when other major economies begin to normalize their policy,” Cho of Shinyoung Securities said. .

On this year’s inflation target, experts expect the BOK to increase it by at least 0.1 percentage point from the current projection of 2.1% made in August this week. .

“The current bottleneck in the global supply chain and rising commodities have fueled inflationary pressure,” said Ahn Ye-ha, analyst at Kiwoom Securities.

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