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MNI BOK WATCH: Flags More Hikes But Wary On Growth

(MNI) Tokyo
(MNI) TOKYO

The Bank of Korea on Thursday flagged the possibility of additional hikes to tame inflation running well above target as it kept its Base Rate steady at 3.5% on concerns about weaker growth following seven consecutive rate increases.

The decision was widely expected as the economy is suffering weaker exports due to slowing overseas growth, while private consumption has been hurt by the cumulative 300bp of tightening since August 2021. Board member Cho Yoon-Je voted against the decision to leave the Base Rate unchanged, proposing to raise it by 25 basis points. (See MNI BOK WATCH: Base Rate Likely Steady As Growth Concerns Rise)

BOK Governor Rhee Chang-yong stressed the decision to maintain the Base Rate at its highest level since 2008 should not be viewed as a peak in rates but rather a pause that would allow a review of incoming growth and inflation data, monetary policy in other economies, and risks to financial stability. "I don’t want today’s decision to be seen as the end of the rate hikes,” Rhee said.

“The Board deems it warranted to judge whether the Base Rate needs to rise further while maintaining the restrictive policy stance for a considerable time with an emphasis on ensuring price stability,” a statement released by the BOK said.

LOWER GROWTH

The BOK lowered this year's GDP growth forecast to 1.6% from an estimate of 1.7% in November, while annual inflation is projected to reach 3.5%, down from November’s estimate of 3.6%.

The bank said domestic economic growth is expected to remain weak due to the global economic slowdown and higher interest rates.

“Although concerns about a recession in major countries have eased, domestic economic growth has continued to slow, with the recovery in private consumption weakening and exports continuing to decrease due to deepened sluggishness in the IT industry,” the BOK said.

However, it offered the prospect of recovery later in the year. “Domestic economic growth is expected to improve gradually from the second half of this year with a recovery in the Chinese economy and in the IT industry. However, uncertainties regarding the outlook are judged to be high.”

HIGH INFLATION

The BOK forecast consumer price inflation will remain around 5% in February, but will gradually decline due to the base effect caused by the sharp rise in global oil prices in 2022 and weaker demand. Inflation is well above the BOK's 2% inflation target.

However, it cautioned the slowdown in inflation is expected to "be more modest" than other large economies due to the impact of higher utilities fees. Inflation accelerated to 5.2% y/y in January from 5.0% y/y in December.

“It is forecast that inflation will continue to be above the target level throughout the year although it is projected to gradually decrease, and uncertainties surrounding the policy decision are also judged to be high,” the BOK said.

If inflation doesn't fall in or after March, or the currency weakens on a prolonged cycle of Federal Reserve rate hikes, the BOK will be under pressure to consider raising the policy rate, observers said.

MNI Tokyo Bureau | +81 90-2175-0040 | hiroshi.inoue@marketnews.com
MNI Tokyo Bureau | +81 90-2175-0040 | hiroshi.inoue@marketnews.com

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