S Korea central bank holds rates, flags a hike in November

SEOUL (CNA) – South Korea’s central bank kept interest rates steady yesterday, taking a breather after its first rate hike in nearly three years in August, but flagged further tightening could come as soon as November to curb rising inflation and household debt.

The Bank of Korea (BOK) held benchmark interest rates steady at 0.75 per cent, as widely expected in a poll, but increased its inflation forecast for this year.

In a rare remark on inflation, South Korean President Moon Jae-in also said during a Cabinet meeting yesterday that the government should make every effort to stabilise consumer prices.

“The bank can consider raising interest rates further at the next meeting should the economic recovery proceed as expected, while monitoring how changes in internal and external conditions affect the domestic economy and inflation,” said Governor Lee Ju-yeol during a news conference, retaining a hawkish tone adopted since May.

South Korea’s three-year treasury bond futures fell more than 0.40 points following Lee’s comments.

“Looking ahead, it is forecast that consumer price inflation will run at the mid-two per cent level for some time, exceeding the path projected in August, before declining somewhat,” the BOK said in a statement.

Pedestrians crossing a road outside the entrance to the Bank of Korea museum at the central bank’s headquarters in Seoul, South Korea. PHOTO: BLOOMBERG

The bank had projected 2021 inflation of 2.1 per cent in August, above the central bank’s two per cent target.

Asia’s fourth-largest economy grew a revised six per cent in the second quarter (Q2) from a COVID-induced slump a year ago, the fastest annual expansion in a decade thanks to robust exports of chips and petrochemical products.

The BOK reiterated it expected the economy to grow four per cent in 2021 after shrinking 0.9 per cent last year.

While a recent spike in daily COVID-19 cases has clouded the short-term outlook, the central bank is keen to contain a surge in private sector debt, a red-hot property market and building inflation pressures.

Annual consumer inflation reached 2.5 per cent in September, staying above the BOK’s target for the sixth month.

Most analysts in the poll had expected the BOK to hike rates in its next rate-setting meeting on November 25 and then to raise them by a further 25 bps, taking the rate to 1.25 per cent by the end of 2022.

“Governor Lee’s comments were a bit more hawkish than expected,” said fixed income analyst at Shinyoung Securities Cho Yong-gu.