Rate Hikes To Continue But Size Not A Given

The Bank of Korea raised its policy rate 50bp to 3% as expected. This was a step up from August’s 25bp, due to “additional inflationary pressures” and increased FX risk. The larger move had been given the heads up by Governor Rhee, as Fed expectations unexpectedly picked up.

• Rates hikes are to continue as inflation remains above target. The pace is to depend on inflation and growth, monetary policy changes abroad, capital flows and geopolitical risk.
• The tricky position of the BoK looks set to continue with the size of further moves likely to be determined on a meeting-by-meeting basis. The next meeting and the last of 2022 is November 24.
• The BoK’s 2023 GDP forecast of 2.1% could be too high but 2022 is in line. Growth is expected to “slow gradually” on the back of higher rates and weaker global demand. The BoK saw slower export growth but consumption recovering.
• The inflation outlook is in line with forecasts but risks are skewed to the upside, as core inflation and inflation expectations remain high. The BoK repeated its statement that inflation should remain elevated in the 5-6% range for a considerable time, as the KRW depreciation provides “additional inflationary pressure”.
• The BoK is caught in a tricky position. On the one hand, inflation remains elevated and it doesn’t want to see its rate gap with the US widen and thus put more pressure on the KRW. On the other hand, there are rising geopolitical risks and global growth is weakening. Korea has a high correlation with world trade volumes, especially its tech sector.
• See statement here.

Korean policy rates still behind the US %

Source: MNI - Market News, Refinitiv

Korean core inflation yet to turn down %

Source: MNI - Market News, Refinitiv