South Korea delivers 25-bp rate hike to combat inflation

SEOUL  -South Korea’s central bank raised its key interest rate by a quarter-percentage point as expected on Thursday, in a bid to contain inflation and prevent capital outflows as the U.S. Federal Reserve gears up for more hikes.

The Bank of Korea raised its benchmark policy rate by 25 basis points to 2.5 percent, resuming normal-sized increments after delivering an unprecedented 50-basis point hike in July to curb inflation now at an almost 24-year high.

All but one of 36 analysts in a Reuters poll expected the bank to go for the quarter-point hike, while one expected a half-point hike.

The bank also upgraded this year’s inflation forecast to 5.2 percent from 4.5 percent, which would be the fastest rate since 1998, and cut its projections for economic growth to 2.6 percent this year from 2.7 percent previously.

It sees growth slowing to 2.1 percent in 2023.

September futures on three-year treasury bonds extended losses after the announcement, falling as much as 0.25 point to 104.41.

The BOK was among the first central banks to abandon pandemic-era monetary stimulus and has hiked a total of two full percentage points since August last year.

South Korean policymakers are now trying to rein in the fastest inflation in over two decades without cratering the economy.

Signs of moderation in the economy are already visible, said Kang Seung-won, an economist at NH Securities.

“Projections for chip-related revenue are already declining from local semiconductor industry, while recession fears in the U.S. and China are clouding the exports outlook,” said Kang, who sees the terminal rate for the BOK at 2.5 percent.

“The BOK is likely to focus more on supporting growth especially towards the end of this year.”

Economists were divided on where rates would be by the year-end. Among the 36 surveyed, three said the central bank would stop at 2.5 percent, half of respondents said at 2.75 percent, 14 said 3 percent and one had a 3.25 percent forecast.

Governor Rhee Chang-yong will hold a news conference at 0210 GMT.