BOK Signals More Rate Hikes, Citing Inflation and Growth

The Bank of Korea's Monetary Policy Board said on the 28th that it would decide the timing and pace of further rate increases while reviewing trends in inflation, economic growth and financial stability.

The board made the remarks in a monetary policy statement released after raising the base rate by 0.25 percentage points to 3.00% from 2.75%. The statement, following a rate increase at the July meeting, is read as underscoring a bias toward additional tightening after two consecutive months of hikes.

"The domestic economy has continued to grow faster than expected, supported by strong exports and a recovery in domestic demand, while inflation is projected to stay above the target level for a considerable period," the board said. "Under these circumstances, it is important to prevent a broadening of price pressures through a preemptive response, and financial stability risks warrant continued attention. The board therefore judged it appropriate to raise the rate."

On the economy, the board said solid growth would continue as "exports and investment maintain high growth on the back of a strong semiconductor cycle, while the recovery in consumption gradually broadens, helped by improving income conditions." The central bank on the same day raised its growth forecast for the South Korean economy this year to 3.3% from 2.6%, an upward revision of 0.7 percentage points. It noted, however, that uncertainties remain over the extent of the semiconductor upturn and its spillover to domestic demand, developments in the Middle East and shifts in the trade environment.

On prices, the board said consumer inflation slowed to 2.8% in July but core inflation, which excludes food and energy, rose to 2.6% as price gains widened for personal services and durable goods. "With the pass-through of accumulated cost pressures continuing and demand-side pressures gradually building on improving income conditions, inflation is expected to run above the target level for a considerable period," it said. It added that "uncertainties surrounding the inflation path are judged to be high, related to movements in global oil prices and the won, the pace of the recovery in domestic demand and the extent to which wage growth spreads."

Taking those variables into account, the board said it would "conduct monetary policy with a view to ensuring that inflation stabilizes at the target level of 2% over the medium term while monitoring growth, and with due attention to financial stability." It added: "In terms of financial stability, continued attention is needed to rising housing prices in the greater Seoul area and the accelerating increase in household debt. Going forward, the board will determine the timing and pace of any further increases while closely monitoring inflation and growth trends as well as financial stability conditions."

Six members of the Monetary Policy Board, including Governor Hyun Song Shin, voted for the rate increase, while board member Hwang Kun-il dissented, arguing that keeping the base rate at 2.75% would be preferable.