South Korea: BoK hiked rates by 25bps – UOB

Economist at UOB Group Ho Woei Chen, CFA, comments on the recent BoK event.

Key Takeaways

“Bank of Korea (BoK) lifted its benchmark base rate by 25 bps to 0.75% today, becoming the first central bank in Asia to start normalising interest rates. The rate move has been wellcommunicated as BoK indicated its readiness to start interest rate normalisation since May but the ongoing fourth wave of COVID-19 outbreak, by far the most serious in the country, added some uncertainty to the timing.”

“The move demonstrates that the BoK is currently more concerned about financial imbalances than growth as it remains confident of the economic recovery, anchored on the stability of exports and while the COVID-19 Delta variant outbreak is expected to slow consumption, it is unlikely to derail the consumption recovery.”

“There is scope for further rate increases as the current interest rate is still below neutral level. Governor Lee Ju-yeol said that the monetary policy has remained accommodative and real interest rate is still negative. The BoK had previously slashed the base rate by 75 bps between March-May last year to record-low level to mitigate the impact of the COVID-19 pandemic.”

“Based on BoK’s assessment, the COVID-19 infections are expected to ease from October. We think the improvement in economic outlook then may provide the opportunity for BoK to raise interest rate by another 25 bps in November. Thereafter, we expect a further 25 bps increase in 1Q22 to bring the benchmark base rate to pre-COVID level of 1.25%.”