MNI STATE OF PLAY: Bank Of Korea Likely To Hike Key Rate To 1%

The Bank of Korea will likely raise its policy interest rate to 1.00% from 0.75% at Thursday's board meeting in the wake of persistent inflation concerns, observers said.

South Korea's consumer price index rose 3.2% y/y in October, the highest level since January 2012, and further gains are expected. The BOK has a 2.5% to 3.5% core inflation target.

"The Inflation rate is expected to move in a range of mid-2% to 3% for the next six months, although the index fluctuates sharply due to the base year effect," Kota Hirayama, senior economist in charge of emerging economies at SMBC Nikko Securities, said.

"Judging from the high inflation rate, the policy rate is too low, and the BOK will likely raise the policy rate about once a quarter," he said.

The BOK raised the policy rate to 0.75% from 0.50% in August for the first rate hike since November 2018, see: MNI: STATE OF PLAY: Bank Of Korea May Hike After October Pause.

PRICE PRESSURES

Prices in South Korea are driven by higher costs for imported crude oil and services, keeping pressure on the BOK to raise the policy interest rate next week, a person who is familiar with the South Korea economy and monetary policy said.

In addition, the BOK is worried about weaker currency as the U.S. Federal Reserve is likely raise rates next year and wants to ensure its own rate stance is in tune, the person said.

Hirayama said that market players have already factored in a rate hike following recent remarks by the BOK Governor Lee Juyeol, who has vowed to support the won and act on inflation pressures.

"If the BOK didn't raise the rate this month, it will cause a weaker won, which in turn will increase import prices. The BOK apparently wants to ease the impact of high commodity prices through stability of the currency," Hirayama said.

He added that the BOK appears to want to swiftly raise the policy interest rate to the pre-pandemic levels of 1.25% or 1.50% and could go as high as 2% depending on crude oil import costs.