South Korea hikes key interest rate to 2.5% amid soaring inflation

SINGAPORE (ICIS)–South Korea’s central bank on Thursday raised its key interest rate by 25 basis points to 2.5% in a move to contain soaring inflation, which it expects to remain at a high level for a considerable period of time.

The Bank of Korea (BOK) last raised its benchmark policy rate by an unprecedented 50 basis points in July to 2.25%.

South Korea’s consumer price index (CPI) rose by 6.3% year on year in July, accelerating from 6.0% in the previous month and the fastest rate recorded in nearly 24 years.

The central bank on Thursday also upgraded its 2022 inflation forecast to 5.2% from a previous estimate of 4.5% made in May, which would mark the fastest pace since 1998.

“Consumer price inflation rate may be lowered due to the fall in international oil prices, but as the core price rises continue, it is expected to remain at a high level of 5-6% for a considerable period of time,” the BOK said in a statement.

The Bank of Korea also cut its forecast for economic growth to 2.6% for 2022 from a previous projection of 2.7% on the back of weakening exports.

“The global economy and international financial markets are expected to be affected by international raw material prices and global inflation, changes in economic indicators and monetary policies of major countries, and geopolitical risks,” it said.

The South Korean economy is expected to grow by 2.1% in 2023.

“While the economy has continued to improve gradually due to recovery in employment and in-person service industries, amid continued high inflation and declines in some indicators of economic sentiment caused by external factors, there are concerns of economic slowdown such as a drag on export recovery in the future,” the Ministry of Economy and Finance said in a statement on 19 August.

In the second quarter, South Korea’s economy posted a 2.9% year-on-year growth, led by a pick-up in private consumption and exports.

“Internationally, although volatility in the global financial market is somewhat reduced, with global inflationary pressure continuously rising, global economic downside risks are higher due to major economies’ interest rate increases, the US and China’s economic slowdowns and the prolonged Russia-Ukraine war,” it said.

Focus article by Nurluqman Suratman

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