SEOUL (Reuters) -South Korea’s central bank kept interest rates steady on Tuesday, taking a breather after its first rate hike in nearly three years in August, but flagged further tightening could come as soon as November to curb rising inflation and household debt.
The Bank of Korea held benchmark interest rates steady at 0.75%, as widely expected in a Reuters poll, but increased its inflation forecast for this year.
In a rare remark on inflation, President Moon Jae-in also said during a cabinet meeting on Tuesday that the government should make every effort to stabilise consumer prices.
“The bank can consider raising interest rates further at the next meeting should the economic recovery proceed as expected, while monitoring how changes in internal and external conditions affect the domestic economy and inflation,” said Governor Lee Ju-yeol during a news conference, retaining a hawkish tone adopted since May.
South Korea’s three-year treasury bond futures fell more than 0.40 points following Lee’s comments.
“Looking ahead, it is forecast that consumer price inflation will run at the mid-2% level for some time, exceeding the path projected in August, before declining somewhat,” the BOK said in a statement.
The bank had projected 2021 inflation of 2.1% in August, above the central bank’s 2% target.
Asia’s fourth-largest economy grew a revised 6.0% in the second quarter from a COVID-induced slump a year ago, the fastest annual expansion in a decade thanks to robust exports of chips and petrochemical products.
The BOK reiterated it expected the economy to grow 4% in 2021 after shrinking 0.9% last year.
HAWKISH TONE
While a recent spike in daily COVID-19 cases has clouded the short-term outlook, the central bank is keen to contain a surge in private sector debt, a red-hot property market and building inflation pressures.
Annual consumer inflation reached 2.5% in September, staying above the BOK’s target for a sixth month.
Most analysts in the Reuters poll had expected the BOK to hike rates in its next rate-setting meeting on Nov. 25 and then to raise them by a further 25 bps, taking the rate to 1.25% by the end of 2022.
“Governor Lee’s comments were a bit more hawkish than expected,” said Cho Yong-gu, a fixed income analyst at Shinyoung Securities.
“I expect the BOK to raise rates in November and saw the next one coming at around (the) third quarter (of) next year, but I am considering bringing that forward after today’s press conference.”
In August, the BOK became the first major Asian central bank to start raising borrowing costs since the COVID-19 pandemic started, putting it ahead of the curve as central banks around the world seek to dial back emergency stimulus.
The U.S. Federal Reserve has signalled it will start trimming its bond-buying as soon as November and the Bank of England has said it may raise interest rates before the end of this year.
Suh Young-kyung and Lim Ji-won, who have been on the hawkish side of the monetary policy debate, were the only board members to vote to raise rates on Tuesday.
(Additional reporting by Choonsik Yoo, Jihoon Lee; Editing by Ana Nicolaci da Costa)
