The Bank of Korea (BOK) returned to its usual pace of policy tightening as it seeks to minimize pressure on the economy and credit markets while keeping inflation in check.
The central bank raised its seven-day repurchase rate by a quarter-percentage point to 3.25 percent on yesterday, a decision forecast by 15 of 17 economists surveyed by Bloomberg. The other two forecast a half-point increase.
The BOK predicts its economy to grow at a slower than previously forecast pace of 1.7 percent next year, with weaker global growth and the impact of rate hikes likely among the factors for the downgrade. In August, the bank forecast an expansion of 2.1 percent.
Markets were largely unmoved after the widely expected decision and forecasts, with yields on three-year and 10-year government falling only slightly and the won steady.
The resumption of smaller rate rises reflects concern among policymakers about a credit rout triggered by the default of a local government-backed developer. The BOK is also worried that further outsized hikes could excessively dampen economic growth when exports are already falling for the trade-reliant nation.
The BOK delivered two half-point hikes this year as it sought to keep pace with the US Federal Reserve and stem the depreciation of the local currency.
The US central bank’s signals about a potential downshift in the pace of its tightening has offered breathing room to the BOK, with the won strengthening from a 13-year low in recent weeks.
Inflation remains a major concern for the South Korean central bank after it edged up to 5.7 percent last month.
Policymakers see consumer-price growth remaining elevated in a 5 percent range for some time, even though they do not expect it to push significantly higher than that.
The BOK forecasts inflation at 3.6 percent next year, a fraction weaker than the forecast in August, but some analysts had looked for a bigger reduction in the view on prices.
“A smaller-than-expected cut in the 2023 inflation outlook suggests the BOK is going to keep its guard up over inflation,” said Ahn Yea-ha, an analyst at Kiwoom Securities Co.
She expects the BOK’s rate to reach 3.75 percent eventually, higher than expected, as the Fed pushes up its own ceiling.
The inflation struggle has had repercussions for South Korea’s housing market, with higher borrowing costs putting pressure on property prices and debt.
South Korea’s household credit increased at the slowest pace on record last quarter, with mortgage-backed loans leading the deceleration in lending.
“It will become harder to increase rates as time goes by, so the central bank is likely to deliver its final rate hike sometime in the first quarter of next year,” said Moon Hong-cheol, a fixed-income and foreign exchange strategist at DB Financial Investment.
“Bond yields should stabilize from here, but the won may stall around the current level because local exports have yet to recover,” he said.
Following the BOK’s announcement of its latest projections for economic growth and inflation next year, BOK Governor Rhee Chang-yong was yesterday to disclose whether there were any dissenters to the latest decision.
Market participants would be interested to know whether any board members called for a half-point hike or even a pause. Rhee might also signal whether the BOK would maintain the usual pace of tightening early next year, and what he sees as the likely level of the terminal rate.
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