South Korea raises interest rates amid household debt, inflation fears | Business and Economy
The Bank of Korea raised borrowing costs by 25 basis points to 1 percent.
South Korea’s central bank raised interest rates and revised its inflation forecast on Thursday, as was widely expected, as concerns about rising household debt and prices signaled further policy tightening next year.
The Bank of Korea’s monetary policy board raised borrowing costs by 25 basis points to 1 per cent – a move that 29 of 30 analysts polled forecasted by Reuters. One analyst said the bank raised interest rates by 50 basis points to 1.25 percent.
It also raised its inflation forecast for next year to 2 percent from 1.5 percent previously, indicating the need for further rate hikes amid concerns of faster and extended price pressures.
Three-year Treasury futures rose 0.14 points after the bank released its revised forecast, while the benchmark Kospi and the won declined.
South Korea has been at the forefront of withdrawing global stimulus as central banks begin scaling back pandemic-era stimulus to contain accelerating inflation and rising fiscal imbalances.
After raising interest rates in August for the first time in nearly three years, consumer inflation in Asia’s fourth-largest economy accelerated to its highest level in nearly a decade in October.
The economy grew 4 percent in the third quarter, thanks to strong exports of chips and petrochemical products, and was satisfied by comparisons to last year’s pandemic recession.
The bank still expects the economy to grow by 4 percent this year and 3 percent in 2022, as forecast in August.
Mounting price pressures and strong growth prompted most analysts polled by Reuters to provide their forecasts. Analysts now see the interest rate as high as 1.25% in the first quarter and 1.5% by the end of 2022.
The rate hike had to be done in November as growth is strong and price pressure is building up. “Another increase is expected early next year to address the financial imbalances,” said Yoon Yu Sam, an analyst at Meritz Securities.
One complication of that is the recent surge in daily COVID-19 cases, which reached more than 4,000 for the first time on Wednesday, clouding the outlook for the coming months.
The Bank of Korea in August became the first major Asian central bank to start raising borrowing costs since the COVID-19 pandemic began.
New Zealand on Wednesday raised interest rates for the second time in two months and the US Federal Reserve is expected to turn to tightening to contain price pressure.
All eyes now turn to Governor Lee Ju-yeol’s press conference at 02:20 GMT, where investors will look for guidance on the timing of the next policy tightening.