South Korea Raises Interest Rates Back to Pre-Pandemic Level

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The central bank raised the benchmark seven-day repurchase rate by 0.25 per cent to 1.25%

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The Bank of Korea said global economies, including South Korea, have shown resilience, despite the emergence of the Omicron version of Covid-19. At the same time, South Korean consumers are facing rising prices due to inflation.

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Bank of Korea Governor Lee Joo-yol said at a news briefing following Friday’s rate decision that he expects inflation to average 3% for a short while and above 2.5% for the full year, which is the bank’s first well above the forecast of 2%. ,

The central bank raised rates by a 6-1 vote. Mr. Lee said there would be further increases later in the year, as he still saw the current rate as an adjustment. “Even raising the base rate further to 1.5% should not yet be seen as a tough policy,” Mr. Lee said.

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In recent weeks, central bankers around the world, including in the UK, Russia and Mexico, have announced rate hikes.

On Thursday, Federal Reserve Governor Lyle Brainard, the White House candidate to serve as the central bank’s No. 2 official, told Congress that efforts to reduce inflation are the central bank’s “most important task.” US inflation rose 7% in December from the same month a year earlier, the fastest since 1982. In recent days, Fed officials have indicated they may raise interest rates at their meeting in mid-March.

Sixteen out of 19 analysts surveyed by the Wall Street Journal had forecast a South Korean rate hike in January. The remaining three had expected one in February.

Most analysts expect a further rate hike later in 2022 as the bank seeks to help cool housing markets amid lower borrowing costs.

South Korea’s finance ministry has set aside nearly $12 billion in additional budget spending to bolster fiscal stimulus, seeking to balance the tapering of monetary support for the economy in the face of a possible virus outbreak. stepped on.

South Korea has faced a winter Covid-19 surge, although daily cases and critically ill patients began to fall from peaks in the past month. On Friday, the country extended tighter restrictions during the Lunar New Year holiday, through February 6, for another three weeks. Health officials allowed gatherings of six people, an increase from the current limit of four.

The central bank estimates that South Korea’s economy will 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 back-to-back rate hikes – the first such move since 2007 – despite economic risks from Omicron. “Today’s move shows that the bank is not too concerned about the economic impact of the virus,” Mr Holmes said. He expects the central bank to take the policy rate to 2.0% instead of 1.75% in 2022.

Write Kwanwoo Jun at [email protected]

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