Bank of Korea Raises Base Rate to Pre-Pandemic Level — Update

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By Kwanwoo Jun
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South Korea’s central bank has brought its base rate back to pre-pandemic levels, raising it for the third time in less than half a year to fight inflation.

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To balance the lack of monetary support for the economy, which is still facing the spread of the COVID-19 Omicron version, the Finance Ministry separately earmarked nearly $12 billion in additional budget spending to enhance fiscal stimulus. Did.

The divergence in monetary and fiscal policy is in response to a mixed bag of economic conditions – accelerating inflation even amid uncertainties about the pandemic hurting small businesses and consumer spending in Asia’s fourth-largest economy.

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The board of the Bank of Korea decided in a 6-1 vote on Friday to raise rates and it raised the benchmark seven-day repurchase rate by 25 basis points to 1.25%. The bank had raised rates in August and November.

BOK government Lee Joo-yol indicated that there could be more hikes later this year as they still viewed the current rate as an adjustment. “Even raising the base rate to 1.50% is yet to be seen as tough policy,” Mr. Lee told an online news conference.

As the BOK announced its decision, Finance Minister Hong Nam-ki said separately that his office was preparing a supplementary budget of $14 trillion ($11.80 billion) by the end of January to help small traders and businesses cope with the pandemic. relevant quarantine restrictions to be supported.

Sixteen out of 19 analysts surveyed by The Wall Street Journal had forecast rate hikes in January. Most analysts plan to hike rates further later in 2022 as the bank seeks to help calm the red-hot housing market amid lower lending costs.

The BoK – like other major central banks – is dialing back the pandemic-era stimulus as the economy recovers and inflation accelerates at a faster rate than expected.

Inflation in South Korea averaged 2.5% in 2021, exceeding the bank’s forecast of 2.3%. It has remained above the bank’s target of 2.0% for nine consecutive months.

Mr. Lee said on Friday he expects inflation to be above 3% for some time and above 2.5% on average for 2022, much higher than the bank’s earlier forecast of 2.0%.

The BOK forecasts South Korea’s economy to expand by 4.0% in 2021 after a 0.9% contraction in 2020. The bank expects a growth of 3.0% in 2022.

Capital Economics Asia economist Alex Holmes noted the BOK’s back-to-back rate hikes – the first such move since 2007 – notwithstanding the economic risks from the Omicron version. “Today’s move shows that the bank is not too concerned about the economic impact of the virus,” Mr Holmes said. He expects the BOK to take the policy rate to 2.00% in 2022 instead of 1.75%.

Write to Kwanwoo Jun at [email protected]

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