South Korea’s central bank joins peers in historic half-point rate hike

Bank of Korea Governor Rhee Chang-yong during a monetary policy meeting in Seoul, South Korea, Wednesday, July 13, 2022. South Korea’s central bank announced a historic rate hike on Wednesday. half-point interest in wresting control of inflation running at the fastest pace in 24 years.

Seong Joon Cho | Bloomberg | Getty Images

South Korea’s central bank on Wednesday announced a historic half-point hike in interest rates to wrest control of inflation at the fastest pace in 24 years.

The Bank of Korea (BOK) raised its benchmark policy rate by 50 basis points to 2.25%, the biggest increase since the bank adopted the current policy system in 1999, as pressure mounts for decision makers act faster.

Twenty-seven of 32 analysts expected the bank to go for an unprecedented half-point hike in a Reuters poll, while the other five expected a quarter-point hike.

The move could help stem further weakening of the won after the currency fell 9.4% against the US dollar this year, making it one of the worst performers among emerging markets.

Wednesday’s move keeps the BOK at the forefront of global monetary tightening as inflation threatens to take hold for a resource-poor country struggling with soaring energy prices, compounded by war in Ukraine.

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The larger-than-usual rise comes as other major central banks, including the Bank of Canada and the Reserve Bank of New Zealand, have made outsized rate hikes in recent weeks. Last month, the US Federal Reserve raised its key rate by 75 basis points and is expected to make moves of a similar magnitude.

“We consider back-to-back 50bps hikes by the BOK in July and August to be less likely, although Governor Rhee may keep the option of an additional +50bps rate hike on the table.” said Citigroup analyst Kim Jin-woo.

“The bank’s press conference and monetary policy statement may highlight preemptive ‘tightening’ monetary policy to manage inflation expectations.”

Governor Rhee Chang-yong will hold a press conference at 02:10 GMT.

Most analysts see South Korea’s key rate rising to 2.75% by the end of this year, up from 2.25% in the May poll.

The BOK expects the economy to grow by 2.7% this year.

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