MNI STATE OF PLAY: BOK Hikes 50bp, Split Views On Next Hike

The Bank of Korea said there were "very high" uncertainties regarding the size of rate hikes to be considered at its November meeting after two members voted against the the decision to raise its Base Rate by 50bp to 3% on Wednesday.

The Bank abandoned August's guidance for "gradual" 25bp hikes, saying its response needed to be "strengthened" given elevated inflation and the risk that the weak Korean won could stoke inflationary pressures. The 50bp hike was expected to stabilise the currency, which last month fell to its lowest point against the U.S. dollar since 2009, by "alleviating" concerns about the widening yield gap between the U.S and South Korea. (See MNI STATE OF PLAY: BOK Guides to 25bps But Tested by Fed View).

Opposition from members Joo Sangyong and Shin Sung Hwan, who both voted for a 25bp hike, cast doubts over the likely size of the hike at its next meeting on November 24 after the BOK said continued rate hikes were "warranted."

"Regarding the size of the policy rate hike in November, there are different views among the Board members and the uncertainties surrounding the policy decision are very high," the Bank said in remarks prepared for its press conference.

"The Board will determine the size of the next rate hike and the path of further increases after closely monitoring external conditions, such as results of the November FOMC meeting and movements in international commodity prices, and evaluating how these conditions may affect domestic inflation and growth as well as financial and foreign exchange markets."

FOCUS ON INFLATION

The BOK said inflation is expected to "remain high" and "substantially" above the target level. The Bank said consumer price inflation will remain high in the 5-6% range for "a considerable time" as the impact of the rising Korean won to US dollar exchange rate provides additional inflationary pressure. South Korea’s consumer price index rose 5.6% y/y in September, slowing from 5.7% in August and 6.3% in July, which was the highest level since November 1998 when it rose 6.8%.

Domestic economic activity was judged to have slowed due to lower export growth. Private consumption was assessed to have maintained its recovery trend and labor market conditions have continued to improve. Domestic economic growth is expected to slow gradually due to the global slowdown and higher interest rates. The BOK said GDP growth for this year would be "generally consistent" with its August forecast of 2.6%, but growth next year was projected to be below the August forecast of 2.1%.

Wednesday’s decision underscored the bank's vigilance against high inflation rate in addition to a weak currency.

"The Board will continue to conduct monetary policy in order to stabilize consumer price inflation at the target level over a medium-term horizon as it monitors economic growth, while paying attention to financial stability."

"The Board will determine the size and pace of further increases of the Base Rate while thoroughly assessing the degree of persistence of high inflation, the pace of growth, monetary policy changes in major countries, financial stability conditions such as capital flows, and geopolitical risks."