South Korea yesterday lifted interest rates for the first time in more than six years, citing a strong economic recovery, and possibly leading the way for similar actions by other Asian central banks.
The hike comes on a series of upbeat readings on Asia’s No. 4 economy that has seen the Bank of Korea and IMF lift their growth forecasts, despite an increasingly belligerent Pyongyang.
The Bank of Korea lifted borrowing costs to 1.5 percent, up 25 basis points and the first since June 2011, pointing to a “solid trend of domestic economic growth,” adding that there have been moderate improvements in private consumption and strong growth in exports.
“Regarding further rate hikes, we will thoroughly monitor the basic flow of growth and inflation,” Bank of Korea Governor Lee Ju-yeol told reporters.
Yesterday’s announcement comes as central banks in Asia prepare for a run of increases by the US Federal Reserve, which many fear could lead to a flood of cash leaving emerging economies as investors look for better and safer returns.
The US central bank, which has already lifted rates three times since December last year, is expected to press on with its tightening next year as the world’s top economy improves and US President Donald Trump looks to push through inflationary tax cuts and spending measures.
Despite the hike, the won was down 1 percent in Asian trade.
Last month, the bank raised its growth forecast for this year to 3 percent, saying it expects a sound recovery led by exports to continue, while the IMF improved its outlook to 3.2 percent, citing “strong momentum.”
“The country’s strong growth outlook means further tightening is likely over the next year,” Capital Economics Ltd economist Krystal Tan (譚恩) said.
A supportive fiscal policy, minimum wage hikes and a rebound in tourism from China are likely to help hold up strong growth over the coming quarters, Tan added.
China has reportedly resumed limited tour group visits to South Korea amid signs of warming ties between the two countries, which were strained earlier this year by Seoul’s installation of a US missile defense system.
However, Tan warned: “Aggressive tightening could cause problems for [South] Korea’s indebted households, who have debts equivalent to 90 percent of GDP.”
Park Chong-hoon, head of research at Standard Chartered Bank in Seoul, said he expected that the Bank of Korea would hold off on any further rate hikes until the second half of next year “as the recovery in domestic demand looks insecure and fast hikes could raise problems for indebted households.”
“Whether the hike decision was unanimous will be of keen interest in the market,” Park said.
Additional reporting by Bloomberg
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