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SEOUL, July 13 (Reuters) – South Korea’s central bank raised its key rate by an unprecedented half a point on Wednesday in a bid to bring inflation down from its highest level in 24 years while balancing fear of a sharp economic slowdown as business activity slumps.
Although 6% inflation prompted calls for action, a widely observed policy rate at the end of the year at 2.75% – five times higher than at the start of the COVID-19 pandemic there is more than two years old – would put pressure on the world’s most indebted consumers who are also struggling with mortgage rates at nine-year highs. Read more
The Bank of Korea (BOK) raised its benchmark interest rate (KROCRT=ECI) by 50 basis points to 2.25%, the biggest increase since the bank adopted the current policy system in 1999, and coming even as it expects gross domestic product growth “below the May forecast of 2.7%.”
Twenty-seven of 32 analysts in a Reuters poll expected the bank to announce a hike of half a point, while the rest expected a quarter point. Read more
“Given inflation and economic conditions, while the risk of economic downside is indeed high, uncertainties remain high, and the Board therefore considers it important at this time to curb the spread inflation expectations by raising rates by 50 basis points to prevent inflation from accelerating,” the BOK said in a statement.
September three-year Treasury bill futures rose after the news, rising 32 ticks to 104.93 at 0335 GMT.
“If inflation and growth trends do not change significantly, a return to 25 basis point hikes seems appropriate at this time,” Gov. Rhee Chang-yong told a conference. press, when asked about another 50 basis point hike.
“For vulnerable people facing greater hardship, we at the central bank will work with the government to seek targeted policy measures to help them,” Rhee also said.
Wednesday’s rise keeps the BOK at the forefront of global monetary tightening as inflation threatens to take hold for a resource-poor country struggling with soaring energy prices aggravated by war in Ukraine .
The larger-than-usual hike comes as other major central banks, including the Bank of Canada and the Reserve Bank of New Zealand, have recently made outsized hikes, including a third consecutive one-half hike. -point by this last Wednesday. Read more
Last month, the US Federal Reserve raised its key rate by 75 basis points and moves of the same magnitude are widely expected.
Most analysts polled this month see South Korea’s rate rising to 2.75% by the end of the year, up from 2.25% in the May poll, as the BOK attacks to inflation while defending itself on several fronts.
Loans to small businesses classified as “vulnerable” or at risk of default increased by 30.6% between the end of 2019 and March 2022, and the BOK sees the proportion increasing sharply after 2023.
In June, exports grew at their slowest pace in 19 months, the January-June trade deficit hit a record high, the won is one of the worst performers among emerging markets and import costs soar harms private consumption, which accounts for about half of the economy. Read more
“The BOK needs to pay more attention to the household debt situation just as it tries to rein in inflation. At the same time, exports are falling for this trade-dependent nation,” Oh Suk-tae said, economist at Societe Generale.
Reporting by Cynthia Kim and Jihoon Lee; Additional reporting by Choonsik Yoo and Yena Park; Editing by Sam Holmes and Christopher Cushing
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