South Korea raises interest rates as inflation hots up

The Bank of Korea's monetary policy board lifted borrowing costs by 25 basis points to 1.00 per cent.
The Bank of Korea's monetary policy board lifted borrowing costs by 25 basis points to 1.00 per cent.PHOTO: BLOOMBERG

SEOUL (REUTERS) - South Korea's central bank raised its policy rate on Thursday (Nov 25), as widely expected, as concerns about rising household debt and inflation offset uncertainty around a resurgence in Covid-19 cases.

The Bank of Korea's (BOK) monetary policy board lifted borrowing costs by 25 basis points to 1 per cent - a move expected by 29 of 30 analysts in a Reuters poll. One analyst saw the bank raising interest rates by 50 basis points to 1.25 per cent.

South Korea has been at the forefront of global stimulus withdrawal as central banks start to trim pandemic-era stimulus to contain quickening inflation and growing financial imbalances.

After raising interest rates for the first time in nearly three years in August, consumer inflation in Asia's fourth-largest economy accelerated further to the highest in nearly a decade of 3.2 per cent last month, far above the bank's current annual forecast of 2.1 per cent.

The economy grew 4 per cent in the third quarter, thanks to robust exports of chips and petrochemical products and flattered by the comparisons with last year's pandemic slump.

Mounting price pressures and firm growth have prompted most analysts polled by Reuters to bring forward their forecasts. Analysts now see the interest rate reaching 1.25 per cent in the first quarter and 1.5 per cent by the end of next year.

"A rate hike has to be carried out in November as growth is strong and price pressure is building up. One more hike is expected early next year to address financial imbalances," said Meritz Securities analyst Yoon Yeo-sam.

One complication to that is a recent spike in daily Covid-19 cases, which reached more than 4,000 for the first time on Wednesday, clouding the outlook for the months ahead.

The BOK in August became the first major Asian central bank to start raising borrowing costs since the pandemic started.

New Zealand on Wednesday raised interest rates for the second time in two months and the United States Federal Reserve is expected to switch to tightening to contain price pressure.