South Korea tempers inflation fight with smaller rate hike amid economic concerns

The central bank increased its seven-day repurchase rate by 25 basis points to 2.5 per cent. PHOTO: AFP

SEOUL (BLOOMBERG) - The Bank of Korea (BOK) raised its key interest rate by a quarter percentage point on Thursday (Aug 25), returning to its usual pace of tightening as it balances the need to tackle inflation with concerns over economic growth.

The central bank increased its seven-day repurchase rate by 25 basis points to 2.5 per cent, in line with the expectations of all economists surveyed by Bloomberg, except one who forecast a half-point hike.

Governor Rhee Chang-yong had already signalled his preference for a more gradual pace of tightening, given the impact of higher borrowing costs on record household debt and the gloomier prospects for global growth.

The BOK, one of the first rate-hikers in Asia-Pacific since the start of the pandemic recovery, carried out its first-ever 50 basis point increase last month to rein in the fastest price growth in more than two decades.

The easing of global energy and food prices since last month has provided Mr Rhee with more scope for tightening at a slower place. Policymakers now see inflation peaking around October.

Following the latest increase, the BOK may now adopt a wait-and-see approach with the policy rate around a neutral level, Citibank economist Kim Jin-wook said before the decision.

That view could be reversed if the Korean won continues to tumble. The currency has been among Asia's worst performers this year and fell to a 13-year low this week, triggering a verbal intervention by the authorities.

Worries about the economic outlook are growing in the minds of BOK board members even as they maintain their push for higher rates. The central bank will shortly release its latest growth and inflation projections, which stood at 2.7 per cent and 4.5 per cent, respectively, in May.

"Growth will be cut while inflation is raised," Shinhan Bank economist So Jaeyong said before the decision. "The BOK has no choice but to keep watching the Fed and fall in line on rate hikes for now."

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