S Korea central bank hikes policy interest rates; truckers on strike

Author: Pearl Bantillo


SINGAPORE (ICIS)--South Korea’s central bank hiked on Thursday its key policy interest rates by 25 basis points to 1.00% to rein in inflation, which rose above 3% partly on spikes in energy prices.

Amid rising transport costs in the country, unionised truckers launched on the same day a three-day general strike to demand higher freight rates, raising concerns about a major nationwide logistics disruption, news agency Yonhap reported.

The Bank of Korea (BoK), in a statement accompanying its monetary policy decision, said consumer price inflation is forecast to "run considerably above 2%, exceeding the path projected in August, and then decline gradually, running at around 2% for 2022 as a whole".

The policy move came “in line with expectations”, with market attention shifting “to the cues for 2022 and how much further rates will be raised this cycle,” said Robert Carnell, Asia-Pacific research head at ING Economics, in a note.

Central banks calibrate monetary policy to ensure price stability, in support of economic growth. Raising interest rates will siphon off excess liquidity from the financial system.

High interest rates can stifle economic activity, which is on recovery mode in 2021 following an unprecedented slump in 2020 caused by the pandemic.

BoK noted that the South Korean economy continued its “sound recovery”, aided by buoyant exports amid the global economic rebound, and improving private consumption.

ING Economics expects the country’s November consumer inflation to be 3.5% year on year, up from 3.2% currently, with the full-year average likely at 2.4%, which will slip to 2.3% in 2022.

“Despite our expectations for more inflation than the BoK is anticipating, there is little in the price data to suggest the same sort of persistence in prices, or development of a wage-price spiral that some may argue is happening in the US,” Carnell said.

“And though the BoK's work is probably not yet done, we don't believe that it will need to raise rates much further this cycle,” he said.

Going forward, the BoK expects private consumption to strengthen further, along with exports and investments.

Stronger exports are indicative of the global economy’s improving health amid easing pandemic-related restrictions at major countries.

South Korea’s full-year 2021 GDP growth is projected to be around 4%, which will slow to around 3% next year “consistent with the forecast in August”, according to the central bank.

“The [Monetary] Board will appropriately adjust the degree of monetary policy accommodation as the Korean economy is expected to continue its sound growth and inflation to run above the target level for a considerable time, despite underlying uncertainties over the virus,” the central bank said.

The Cargo Truckers Solidarity (CTS) of South Korea is demanding an extension of the "Safe Trucking Freight Rates System", which imposes fines on shipping companies that do not pay certain cargo truck drivers an adequate freight fare, Yonhap reported.

The strike will be staged at major seaports and logistics bases, and its members plan to hold a massive protest rally in Seoul on Saturday (27 November), it said.

"Cargo truck drivers are forced to drive dangerously, overwork and overload due to a sharp increase in diesel prices and other costs and income reductions," a CTS official was quoted by the news agency as saying.

There were concerns that this could lead to a nationwide logistics crisis as a large number of drivers for South Korea’s 8,500 container trucks and 1,500 cement trucks are affiliated with CTS, it said.

Focus article by Pearl Bantillo