The Bank of Korea raised its benchmark interest rate for the fifth time in a year as new governor Rhee Chang-yong said he would put fighting inflation as his number one priority.
The South Korean central bank increased the key interest rate by 25 basis points to 1.75% on Thursday.
Rhee has said inflation was a bigger concern for the BoK than other headwinds to economic growth.
“The BoK likely made the move to clamp down on inflationary pressures, as it made a large upwards adjustment to its inflation forecast,” said Alex Holmes, economist at Capital Economics.
Inflation to Beat Forecast
BoK expects inflation to reach 4.5% this year, much higher than its previous 3.1% forecast, while gross domestic product growth is tipped to fall to 2.7% from a previously estimated 3%.
“The upshot is that while the Bank should remain hawkish in the near term, it is likely to turn decidedly less so further ahead as the economy slows,” Holmes said.
“In contrast to market pricing for many more hikes in 2023, we think the tightening will finish this year.”
Consumer prices grew 4.8% in April from a year earlier, the fastest pace since 2008.
“With price pressures set to remain elevated in the near term, we expect the Bank to continue hiking in quick succession over the coming months,” Holmes added.
- George Russell
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