Bank of Korea set to finish tightening on Jan. 13 with 25 bps move: Reuters poll

BENGALURU – The Bank of Korea will raise interest rates by another quarter percentage point on Friday, likely its last move in an aggressive tightening cycle aimed at quelling inflation running at more than twice its 2 percent target, a Reuters poll has found.

One of the first major central banks to kick off a hiking cycle back in August 2021, the BOK has lifted rates by a total of 275 basis points to 3.25 percent but is under pressure to ensure a soft landing for the economy.

BOK Governor Rhee Chang-yong said in November the central bank was ready to slow the pace of policy tightening and suggested the rate would peak in this cycle at around 3.5 percent.

A strong majority of economists, 36 of 40, in the Jan. 5-10 poll forecast the BOK to raise rates by 25 basis points to 3.5 percent at its Jan. 13 meeting, which would be the highest since 2008. The other four expected no change.

“We are looking for one last rate hike of the cycle on Friday. We think it will be non-unanimous where one dissenter calls for a no change,” said Kathleen Oh, economist at BofA.

“That would send a message there is less chance of an additional rate hike from there,” she said.

“Recent developments, especially on the inflation front, have come down to the point where the members can take a little bit of comfort, that there is a sign of stabilizing inflation.”

Policymakers worry South Korean households, already among the world’s most indebted, were more susceptible to interest rate rises because of the prevalence of variable mortgage rates. Real estate prices are already falling.

Three quarters of respondents, 30 of 40, forecast the key interest rate to remain unchanged at 3.5 percent until end-March. But seven expected another hike by 25 basis points to 3.75 percent and three predicted rates to still be at 3.25 percent.

However, median forecasts predicted the base rate to stay at 3.5 percent until the end of this year.

“Inflation is still a concern … and is likely to stay above 4 percent until 1Q23,” wrote Lee Seung-hoon, chief economist at Meritz Securities.

“Like the Federal Reserve, (the) BOK will now move to higher for longer strategy instead of conducting further rate hikes beyond January. With household debt service elevated, further hikes beyond 3.5 percent may cause additional downsides for the economy with limited impact on inflation.”

The poll forecasts inflation to average 3.3 percent and 2 percent this year and next, compared to 3 percent and 2 percent predicted in an October poll.

With inflation expected to fall within target next year, median forecasts from economists who had a long-term view showed rates falling to 2.75 percent in the third quarter of 2024.

South Korea’s economy was expected to grow 1.3 percent in 2023 and 2.3 percent in 2024, down from 1.9 percent and 2.5 percent forecast in the previous survey.