MNI STATE OF PLAY: Bank Of Korea To Hike 50bps As Prices Bite

The Bank of Korea is expected to raise its policy interest rate to 2.25% from 1.75% at the July 13 meeting as it puts the priority on fighting inflationary pressures over a slower economy, observers said.

“The BOK will likely raise the policy rate by 50 basis points (to 2.25%) next week,” judging from the weaker currency and the higher inflation rate," Kota Hirayama, senior economist in charge of emerging economies at SMBC Nikko Securities, said.

He added that the currency weakness accelerated after a 75-basis points rate hike by the U.S. Federal Reserve led to a weaker won against the dollar, (See: MNI STATE OF PLAY: Bank Of Korea Notes Price Concerns In Hike). The BOK needs to show s strong stance on the currency and high inflation with a bigger rate hike, Hirayama said.

South Korea’s consumer price index rose 6.0% y/y in June for the highest level since 6.8% in November 1998, accelerating from May’s +5.4% and increasing pressure on the bank to implement a bigger rate hike. The CPI rose in almost every sector, with petroleum products jumping 39.6%

OUTLOOK

BOK Governor Rhee Chang-yong did not rule out a half-point rate hike at the previous meeting in May.

A 50-basis point rate hike will be a first time for the BOK, likely followed by 25 basis points in August, and then a pause, a person who is familiar with South Korea economy and monetary policy said. The person added that exports will play a main role in supporting the economy as shipments to China are recovering, although exports to the U.S. are expected to slow.

Hirayama said that the BOK needs to pay attention to the risk that wage hikes will boost services prices, and then push up the inflation rate further, risking an overheated economy.

South Korea will increase its minimum wage by 5% in 2023 to 9,620 won an hour nationwide, its Minimum Wage Commission has said. The government implemented a similar hike for this year, nearly doubling minimum pay from a decade ago.