South Korea raises rate 3rd time, inflation seen higher

      South Korea's central bank raised its monetary policy rate for the third time, as widely expected, and said it will continue to "appropriately adjust the degree of monetary policy accommodation as the Korean economy is expected to continue its sound growth and inflation to run above the target level for a considerable time, despite underlying uncertainties over the virus."
      The Bank of Korea (BOK) raised its base rate by another 25 basis points to 1.25 percent and has now raised it by 75 basis points following rate hikes in August, November and today.

      In November the central bank's monetary board also said it would appropriately adjust the degree of policy accommodation as the economy is expected to continue growing and inflation to run above the bank's target of 2.0 percent.
      Deciding when to tighten monetary policy again, BOK said it would take into account the impact of COVID-19 on growth and inflation, the risk of a buildup of financial imbalances, the effect of rate increases and changes in monetary policy in other countries.

     Today's rate hike was widely expected as the bank's governor, Lee Ju-yeol, on Dec. 24 and Dec. 31 said interest rates would need to be adjusted in line with improving economic conditions.

      "The Korean economy has continued to recover despite the resurgence of COVID-19," BOK said today, adding it still projects growth this year of around 3 percent, as forecast in November.

      South Korea's gross domestic product slowed in the third quarter of 2021 to annual growth of 4.0 percent from 6.0 percent in the second quarter, with growth in 2021 estimated around 4.0 percent.

      A tightening of pandemic-related restrictions had moderated growth in private consumption but exports had remained buoyant due to robust global demand, BOK said, adding facilities investment had slowed due to global supply constraints.

      "Going forward, the economy is likely to sustain its sound growth, as the recovery of private consumption is forecast to pick up again while exports are expected to continue their solid trend of increase," BOK said.

      Inflation in South Korea has topped 3 percent in the last three months - it eased slightly to 3.7 percent in December from 3.8 percent in November - and BOK said it now expects inflation to continue to run in the 3.0 percent range "for a considerable time," exceeding the path it projected in November.

     In November BOK raised its forecast for 2021 inflation to 2.3 percent and expected inflation to remain at that level in the first half of 2022 before easing in the second half of the year to average 2 percent.

     BOK now expects headline inflation to be above 2 percent this year while core inflation is expected to run "considerably" above 2 percent.

     The Bank of Korea issued the following press release:

"The Monetary Policy Board of the Bank of Korea decided today to raise the Base Rate by 25 basis points, from 1.00% to 1.25%.

Currently available information suggests that the global economy has continued to recover despite the spread of a new coronavirus variant, as economic activity has not contracted significantly, supported by accelerated vaccinations. In global financial markets, government bond yields and stock prices in major countries have rebounded after having declined, affected by developments related to COVID-19 and changes in expectations about monetary policy in major countries. Looking ahead, the Board sees global economic growth and global financial markets as likely to be affected largely by COVID-19 developments and the status of vaccine distribution, as well as by global inflation movements and monetary policy changes in major countries.

The Korean economy has continued to recover despite the resurgence of COVID-19. Although the improvement in private consumption has moderated owing to the tightening of domestic COVID-19 restrictions, exports have sustained their buoyancy thanks to robust global demand. Facilities investment has somewhat slowed due to global supply constraints. Labor market conditions have continued to improve, with a sustained trend of increase in the number of persons employed. Going forward, the economy is likely to sustain its sound growth, as the recovery of private consumption is forecast to pick up again while exports are expected to continue their solid trend of increase. GDP growth this year is projected to be around 3%, consistent with the forecast in November.

Consumer price inflation has risen to the upper-3% level due to the ongoing sharp rise in the prices of petroleum products and agricultural, livestock, and fisheries products, as well as the accelerating increase in the prices of non-petroleum industrial products and personal services. Core inflation (excluding changes in food and energy prices from the CPI) has run at the lower-2% level and the inflation expectations of the general public have run at the mid- to upper-2% level. Looking ahead, it is forecast that consumer price inflation will continue to run in the 3% range for a considerable time, exceeding the path projected in November, and above the mid-2% level for the year overall. Core inflation is forecast to run considerably above 2% this year.

In domestic financial markets, long-term market interest rates fell due to concerns over the resurgence of COVID-19 but have rebounded affected by the rise in US Treasury yields. The Korean won to US dollar exchange rate rose considerably, due mainly to the prospect of accelerating monetary policy normalization by the US Federal Reserve, but then decreased. Stock prices have fallen slightly. The amount of increase in household loans has lessened, and the increase in housing prices has somewhat moderated in all parts of the country.

The Board will continue to conduct monetary policy in order to sustain the recovery of economic growth and stabilize consumer price inflation at the target level over a medium-term horizon, while paying attention to financial stability. The Board will appropriately adjust the degree of monetary policy accommodation as the Korean economy is expected to continue its sound growth and inflation to run above the target level for a considerable time, despite underlying uncertainties over the virus. In this process the Board will judge when to further adjust the degree of accommodation while thoroughly assessing developments related to COVID-19, changes in the pace of growth and inflation, the risk of a buildup of financial imbalances, the effects of the Base Rate raises, and monetary policy changes in major countries."

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