BOK signals continued tightening as inflation stays high and growth holds up
Key Takeaways
- •The Bank of Korea raised its benchmark rate by 25 basis points to 2.75%, its first hike in 3½ years.
- •The central bank said it expects to maintain a rate-hike trend while considering inflation pressure, economic trends and financial stability.
- •South Korea’s economy grew 0.6% in the second quarter from the previous quarter, beating the BOK’s 0.2% forecast.
- •The BOK said strong exports, investment and a chip boom are supporting growth but also adding to inflation pressure.
- •The bank warned that inflation is likely to remain above target and that services and industrial goods prices may accelerate amid global oil price uncertainty.
South Korea's central bank said Wednesday that it is necessary to maintain a monetary tightening mode as inflation pressure remains high and the country's economy is likely to continue growing.
Earlier this month, the Bank of Korea raised its benchmark rate by a quarter percentage point to 2.75 percent, marking the first rate hike in 3 1/2 years. The move was aimed at combating escalating prices amid a volatile local currency and came as robust exports were expected to support solid economic growth.
"Going forward, we judge that there is a need to maintain a rate hike trend and will decide on the rate level and the timing, taking into consideration the degree of inflation pressure, economic trend and financial stability," the central bank said.
The BOK said the earlier rate hike was made because inflation is expected to remain above its target for a prolonged period amid an economic pickup, while risks to financial stability continue to remain in place. That combination helps explain why the central bank is weighing price pressures alongside the broader pace of the economy rather than focusing on inflation alone.
The central bank also said South Korea's economy will continue to show solid growth, supported by strong exports and investment.
The South Korean economy grew 0.6 percent in the second quarter from the previous quarter, exceeding the BOK's May forecast of 0.2 percent growth on strong exports, with 3 percent annual growth within reach. Those figures matter for the BOK's policy stance because stronger-than-expected activity can leave less room for rapid easing even as borrowing costs rise.
The BOK also said inflation pressure will increase as a chip boom boosts income effects and investment.
"Prices of services and industrial goods will accelerate amid uncertainty over global oil prices, and inflation will continue to top the target level," it said.
On the local stock market, the BOK said downside risks will be limited given the strong performance of key chipmakers, including Samsung Electronics.
The local stock market has been volatile amid concerns over whether chip demand will remain as strong as expected, with the country's benchmark index falling nearly 30 percent this month alone. (Yonhap)