MNI BOK WATCH: Hikes 25bp, Flags More to Come As GDP, CPI Cut

The Bank of Korea flagged more interest rate hikes to steer inflation back to its target despite lowering its 2023 forecasts for growth and the consumer price index, as it raised its Base Rate by 25bp to 3.25% after Thursday's meeting of policymakers.

Concerns about inflation remaining above target for a "considerable" time underpinned the unanimous decision to lift rates to the highest level since 2012, though the timing of further hikes and the peak rate was unclear given "different views" among board members due to "high uncertainties" about the economic outlook. The 25bp hike was in line with market expectations. (See MNI BOK WATCH: Downshifting to 25bp Hike As Growth Slows)

“The Board sees continued rate hikes as warranted for some time, as inflation is expected to remain high, substantially above the target level, although the domestic economic growth rate has slowed,” the BOK said in a statement.

Uncertainties about the growth outlook were reflected in the downshift from the 50bp hike announced in October and the lowering of the bank's 2023 GDP growth forecast to 1.7% from its August estimate of 2.1%. The lower growth outlook was attributed "mostly" to the global slowdown and "partially" to the cumulative impact of 275bp of hikes since August 2021. The BOK maintained its forecast for 2.6% growth for this year.

Steering inflation back to its 2% target remains the top priority despite the growth outlook. The BOK trimmed its CPI forecast for this year to 5.1% from its 5.2% estimate in August, while its 2023 estimate was cut to 3.6% from 3.7%. The lower forecasts were attributed to base effects and the economic slowdown. A rebound in the Korean won has alleviated some inflationary pressures. The CPI rose at a 5.7% y/y pace in October.

EYE ON THE FED

Governor Rhee Chang-yong said the BOK would give consideration to U.S. monetary policy, and its impact on the won, as Federal Reserve officials debate a possible slowing in its pace of hikes.

“The Board will determine the Base Rate in the meetings next January and beyond after closely monitoring policy decisions of the US Federal Reserve, including in the December FOMC meeting," he said, adding consideration would be given to its "influence on the foreign exchange market." The next policy-decision meeting is on January 13, 2023.

Rhee said domestic economic growth continued to slow. "Although consumption has maintained its recovery momentum, export growth has been slowing rapidly, with exports shifting to a decline in October due to weakening growth in major countries.”

The BOK’s GDP 2023 forecast is lower than those of Asian Development Bank (2.3%), International Monetary Fund (2%) and the Korea Development Institute (1.8%), a Korean government agency.