S.Korea's central bank to hike interest rates by half point next week

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S.Korea's central bank to hike interest rates by half point next week

The Bank of Korea logo is seen in Seoul.

BENGALURU Reuters -- South Korea's central bank will hike rates by another half-point next week, pushing borrowing costs higher than earlier predicted to support a weakening won and dulling its effect on inflation, a Reuters poll showed.

The U.S. Federal Reserve has indicated it will keep rates higher for longer, due to a widening rate differentials and an aggressive U.S. Federal Reserve.

The Korean won was expected to drop another 1.6% by the end of 2022, a separate Reuters poll showed. It fell despite the Bank of Korea BOK raising interest rates by 200 basis points since August.

The expectation was for the BOK to stay the course and continue to hike interest rates over the coming quarters.

In the Oct. 4 -- 6 poll, 88% of economists predicted the BOK to increase its base rate by 50 basis points to 3.00% at its Oct. 12 meeting. The remaining three expected an increase of 25 basis points.

Fending off FX pass-through onto CPI inflation is a priority for the Bank of Korea during the remaining period of the current hiking cycle, according to Kathleen Oh, economist at Bank of America Securities.

The central bank is going to change its course of baby steps to a 50 bp hike, moving with the mighty hawks at the Fed. The median forecast showed the base rate going to 3.25% by the end of the year and peaking at 3.50% in the first quarter of 2023. The predicted top rate was higher than the 2.75% forecast in an August poll.

Nearly half of the economists, 12 of 25, predicted the base rate to reach 3.75% in Q1 of next year, suggesting that the bias was toward borrowing rates going up as inflation was 5.6% in September from the same month a year ago, which was well above the BOK's target of 2.0%.

A comforting pullback in inflation will take time, and the BOK has made clear that inflation will remain its top priority if it stays below 5 -- 6%, said Krystal Tan, economist at ANZ.

The inflation was higher this year, from 5.2% and 3.0%, higher than the 5.0% and 2.7% predicted in a July poll.

South Korea's economy was expected to grow 2.6% in 2022 and 1.9% in 2023, compared with 2.5% and 2.4% predicted in the previous survey.