MNI STATE OF PLAY: Bank Of Korea Eyes  Won, Inflation On Rates

Increasing economic uncertainty amid high coronavirus case numbers will see the Bank of Korea tread cautiously even as it has signalled more hikes for early 2022 to cool the economy with currency and inflation levels the keys for policy decisions.

The BOK is mostly expected to keep its benchmark rate at 1.00% at Friday’s policy-decision meeting and wait until February as it further assesses monetary and financial conditions, according to sources who spoke to MNI, see: MNI STATE OF PLAY: Bank Of Korea Governor Flags Rate Hike In Q1.

“My baseline scenario is that the BOK may not need to rush to raise the rate in the wake of high uncertainties over the economy amid increasing infections,” Kota Hirayama, senior economist in charge of emerging economies at SMBC Nikko Securities, said.

"The inflation rate rose 3.7% in December, but it is still at a 3% level. The central bank cannot control a high inflation rate caused by the rise in raw material prices," and the now isn't good timing to raise rates, Hirayama said.

SLOWER HOUSE PRICE GAINS, WON IN FOCUS

The BOK will not raise rates this week as house price gains have slowed, a person who is familiar with the South Korea economy said.

However, the source said that if the bank is seriously worried about a weaker currency the chance of a rate increase grows. The dollar rose to a KRW1200 level in early January for the highest level since July 2020 and the BOK wants to prevent the currency from further weakening, which will increase inflationary pressure. The dollar traded around KRW1189.

“Looking ahead, the risk of a weaker currency will remain high for the time being as the U.S. Federal Reserve is set to accelerate its tapering and rate hikes,” the person said, adding that the number of rate hikes by the BOK this year depend on the currency moves.

Hirayama on the other hand said that a weak currency does not have serious impact on inflation rate, rather, it contributes to boosting exports.

But Kim Myoungjung, a Social Improvement and Life Design Research Department Research fellow at NLI Research Institute, said that the BOK will raise the policy rate to 1.25% this week amid persistently high inflation.

Kim added that more two rate hikes are expected this year as the Fed is set to raise the policy rate, which will widen an interest rate gap between U.S. and South Korea.

BOK Chairman Lee Juyeol said on Dec. 31 that the bank must carefully examine the possibility that inflationary pressure continues for longer than expected. He also said the degree of monetary policy should be adjusted based on economic conditions in an appropriate manner.