S.Korea's central bank likely to hike interest rates on Thursday

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S.Korea's central bank likely to hike interest rates on Thursday

BENGALURU Reuters -- South Korea's central bank is likely to hike its benchmark rate at a second consecutive meeting on Thursday to combat inflation, which is more than double its target, taking rates higher by year end than previously thought, according to a Reuters poll.

In April, inflation in Asia's fourth-largest economy went up to more than a 13 year high of 4.8%, as the repercussions of the Russia-Ukraine war and a weaker won, down 7% this year, ramped up prices. Inflation has stayed above the central bank's target of 2.0% for more than a year.

All but one of the 28 economists polled May 17 -- 23 predicted that the Bank of Korea BoK will raise its policy rate by 25 basis points to 1.75% at its May 26 meeting.

The base rate has been hiked by 100 basis points since August 2021, which is among the first central banks to have started raising rates since the Pandemic.

The BoK expects to follow up on a May move with two more hikes, one per quarter, taking rates up to 2.25% by the end of the year, based on a majority view of 17 of 28 economists.

Three expected rates were expected to end the year at 2.50%, seven said 2% and one said 1.75%.

The majority view is up 25 basis points compared to the April poll, which took rates to a level last seen in the second half of 2014.

There is no consensus that rates will go above that by the end of the year.

According to Oh Suktae, an economist at Societetete Generale, it would be difficult to extend the rate-hike cycle into 2023, as we expect the peak-out of inflation in 2 H22.

A separate poll last month predicted South Korean inflation to be 3.3% this year, but it would fall to 2.0% in 2023, according to a separate poll taken last month.

Nine out of 20 economists who provided an end- 2023 rate view in the latest survey said 2.50%, four said 2.25%, while the rest said 2.0% or lower.

The BoK is under some pressure with the won down this year to keep hiking while the world's biggest central bank is raising rates and aggressively at the moment.

A separate Reuters survey showed that the U.S. Federal Reserve will take the key interest rate to 2.50 2.75% by the end of the year, compared to 2.00 2.25% predicted just a month ago. ECILT US A deteriorating balance of payments position at a time when the U.S. Fed is normalising monetary policy will add impetus for the BoK to act sooner rather than later, said Krystal Tan, economist at ANZ.

Earlier this month, BoK's newly-appointed Governor Rhee Chang-yong, who is due to chair his first policy meeting on Thursday, said he could consider bigger interest rate increases in the coming months.