SOUTH Korea today raised its benchmark interest rate for the seventh time in a row as it struggles to tame runaway inflation, though it slowed the pace as central banks around the world show signs of easing back from their hawkish tightening drive.
The Bank of Korea (BOK) lifted borrowing costs by 25 basis points to 3.25% – the highest since 2012 – meaning it has now hiked rates a combined 2.75 percentage points since August last year.
The hike was determined “in overall consideration of the easing of risks in the foreign exchange sector and the contraction of short-term financial markets”, the BOK said in a statement.
This year alone it has raised rates 2.25 percentage points to keep pace with the US Federal Reserve, prevent foreign capital outflows and stabilise the local won currency, which hit a 13-year-low at one point this year.
The won depreciation is making inflation worse in South Korea, which is heavily reliant on energy imports.
Consumer inflation, which hit 5.7% last month, continues to be a major concern for the BOK, which projected price increases will hover around the 5% level “for some time” but soften to 3.6% next year.
Asia’s fourth largest economy was projected to grow 2.6% this year, the BOK said, but it noted the growth momentum next year will likely be weaker at 1.7%, downgrading an earlier projection of 2.1% from August.
“Going forward, domestic economic growth is expected to weaken, affected by the global economic slowdown and the increase in interest rates,” it said.
The BOK will determine its next move to “stabilise consumer price inflation at the target level… as it monitors economic growth”.
Central banks around the world have launched a series of rate increases as Russia’s war in Ukraine has led to a surge in energy and food prices that has driven up inflation.
However, signs of a slowdown in economic activity in recent months has given monetary policymakers room to begin taking their foot off the pedal. – AFP, November 24, 2022.