Mon. Dec 6th, 2021

Bank of Korea increases borrowing costs by 25 basis points to 1 percent.

South Korea’s central bank on Thursday raised interest rates and revised its inflation outlook, as widely expected, as concerns about rising household debt and prices point to further policy tightening next year.

The Bank of Korea’s Monetary Policy Council has raised borrowing costs by 25 basis points to 1 per cent – a move expected by 29 out of 30 analysts in a Reuters poll. One analyst saw the bank raise interest rates by 50 basis points to 1.25 percent.

It also raised its inflation outlook for next year to 2 per cent from 1.5 per cent previously, suggesting the need for further rate hikes amid concerns over faster and more protracted price pressures.

The three-year Treasury bond futures rose as much as 0.14 points after the bank released its revision of forecasts, while the benchmark KOSPI and the won fell.

South Korea has been at the forefront of global stimulus withdrawal as central banks began reducing pandemic-era stimulus to contain accelerated inflation and growing financial imbalances.

After rising interest rates for the first time in almost three years in August, consumer inflation in Asia’s fourth-largest economy accelerated to a near-decade high in October.

The economy grew by 4 percent in the third quarter, thanks to robust exports of chips and petrochemicals, and flattened by comparisons with last year’s pandemic slump.

The bank still sees the economy grow 4 percent this year and 3 percent in 2022, as projected in August.

Rising price pressures and solid growth forced most analysts polled by Reuters to advance their forecasts. Analysts now see that the interest rate will reach 1.25 percent in the first quarter and 1.5 percent by the end of 2022.

‘Financial imbalances’

“A tariff increase had to be carried out in November as growth is strong and price pressure is building up. Another increase is expected early next year to address financial imbalances, ”said Yoon Yeo-sam, an analyst at Meritz Securities.

One complication for that is a recent rise in daily COVID-19 cases, which reached more than 4,000 for the first time on Wednesday, blurring the outlook for the coming months.

The BOK became the first major Asian central bank to start raising borrowing costs in August since the COVID-19 pandemic began.

New Zealand on Wednesday raised interest rates for the second time in two months and the US Federal Reserve is expected to switch to tightening to curb price pressures.

All eyes are now on Governor Lee Ju-yeol’s news conference at 02:20 GMT, where investors will seek guidance on the timing of the next policy tightening.

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